January 13, 2017 / 9:56 AM / a year ago

Fitch Affirms Hydoo at 'B-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, January 13 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Hydoo International Holdings Limited (Hydoo) at 'B-'. The Outlook is Stable. The company's foreign-currency senior unsecured rating and the rating on its outstanding USD160m 13.75% senior unsecured bond due 2018 have also been affirmed at 'B-', with a Recovery Rating of 'RR4'. The rating is supported by Hydoo's manageable leverage, achieved through a controlled pace of construction and land acquisition, slow sales strategy to protect margins and adequate liquidity. The rating is constrained by weak sales performance amid sluggish trade centre demand. KEY RATING DRIVERS Weak Trade Centre Demand: Contracted sales for trade centre and logistic developers weakened further in 2016 due to small-to-medium enterprises scaling down new investments, slower relocation demand, delays in local governments completing transport networks and lower investor appetite for commercial properties. Hydoo recorded CNY1.1bn in contracted sales for 1H16. The developer's average selling price declined to around CNY4,700 per square metre (sq m), from CNY6,400 per sq m in 2015, due to a larger portion of residential product sales coming from third- and fourth-tier cities, which recorded average selling prices of between CNY3,000-4,000 per sq m (1H16: 27% of total sales compared with 2% in 2015). Fitch expects Hydoo's contracted sales to reach around CNY2.5bn in 2016 and 2017, as there are no signs of recovery in the trade centre industry. Lower-Tier Cities Riskier: Hydoo's trade centres are mainly in tier-3 and tier-4 cities to tap relocation and urbanisation demand. Fitch believes sales are more volatile in these cities than in more developed locations and demand may reach saturation faster due to the smaller populations and GDP in these economies. Sales for subsequent phases of Hydoo's large-scale integrated trade centre projects - those greater than 400,000 sq m - hinge on continued urbanisation, which may slow due to growing market uncertainty. Rising but Manageable Leverage: Hydoo's leverage deteriorated quickly to 39% at end-1H16, from 25% at end-2015 and a net cash position at end-2014, due to slower sales, continued capex and increasing restricted cash pledged for bills payable. However, the company scaled down its construction pace, with completed gross floor area falling by 43% yoy in 2016. Land acquisition also slowed, with a total land premium of CNY127m in 1H16, compared with CNY857m in 2015. Fitch believes Hydoo's large landbank of around 10 million sq m available for development provides it with flexibility to reduce land purchases. Fitch expects leverage to be at around 30% in 2016 and remaining below a manageable 40% in 2017 and 2018, supported by the controlled construction pace and slower land acquisitions. Liquidity Pressure Alleviated: Hydoo's liquidity was tight at end-1H16, with an unrestricted cash balance of CNY794m only covering 44% of CNY1.2bn in short-term debt and the USD80m outstanding convertible bond with Pingan Real Estate Capital Limited, which had early redemption starting in January 2016. However, Hydoo's liquidity improved from mid-2016 following the company's 2H16 offshore financing activities, including issuance of two offshore bonds totalling USD120m at 13.75% to repay the convertible bond. Fitch does not believe Hydoo faces any short-term liquidity pressure given its proven refinancing ability. Low Recurring Non-Development Income: Hydoo's business profile is constrained by its focus on trade centre development and low recurring non-development income, which contributed 3% of revenue in the last 12 months to 1H16. The lack of diversification weakens cash flow quality and increases operation risk during industry downturns. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Hydoo include: - Contracted sales remaining weak at CNY2.4bn-2.8bn each year between 2016-2018. - Construction expenditure at CNY1.6bn-1.8bn each year between 2016-2018. - Land replenishment ratio (land acquired/gross floor area presold) at 0.8x-1.2x in 2016-2018. - EBITDA margin at 25%-32% in 2016 and 2017 (2015: 34%). RATING SENSITIVITIES Developments that may, individually or collectively, lead to negative rating action include: - deterioration in refinancing prospects that has a significant adverse effect on Hydoo's liquidity profile. No positive rating action is expected in the next 12-18 months given persisted weak industry demand. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Tertiary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017506 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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