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Fitch Rates Future Land's USD bonds 'BB-(EXP)'
February 9, 2017 / 2:21 AM / 10 months ago

Fitch Rates Future Land's USD bonds 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG, February 08 (Fitch) Fitch Ratings has assigned China-based Future Land Development Holdings Limited's (Future Land; 'BB-'/Positive) US dollar senior notes a 'BB-(EXP)' expected rating. The notes are rated at the same level as Future Land's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The final rating of the notes is subject to the receipt of final documentations conforming to information already received. Future Land says it intends to use the net proceeds from the note issue for general corporate purposes. KEY RATING DRIVERS Strategic Positioning: The Positive Outlook reflects Fitch's view of Future Land's strategic position in the Yangtze River Delta region. Its positioning continues to support its scale, which compares well against 'BB' rated peers. Future Land's recent aggressive land banking, if not supported by continued expansion in its scale, could put pressure on its leverage. This is, however, mitigated by its strong sales turnover, as measured by contracted sales/gross debt, which was 1.8x at 1H16 and averaged at 1.5x annually since 2010. This demonstrated the company's ability to rapidly generate sales from new land acquisitions. Fitch estimates Future Land's recurring EBITDA/interest expense will remain 0.15x-0.2x over the next three years as it starts to expand its shopping mall portfolio, which also supports the rating. Critical Scale Achieved: Future Land recorded exceptionally strong presales in 2016, driven by better sell-through rates on projects located in Tier 3 and Tier 4 cities, as well as a higher average selling price (ASP) in the Yangtze River Delta. Consolidated gross floor area sold in 2016 increased 45% yoy to 4.7 million square metres (sq m) and the ASP increased 13% yoy to CNY10,121 per sq m. We expect Future Land to maintain consolidated contracted sales of more than CNY40bn per year. Leverage May Pressure Rating: Future Land increased its land purchases in 2H16, after a slow 1H16, with full-year attributable land premiums reaching CNY47bn; representing 72% of total presales of CNY65bn (including presales from joint ventures). Future Land has been sourcing JV partners to share costs for the more expensive land sites it bought in Shanghai, Nanjing and Suzhou. Its aggressive land acquisitions in 2016 are likely to lead to a temporary spike in leverage to 45%-50% by end-2016, from 42% at end-1H16 and 33% at end-2015. The company intends to reduce land purchases in 2017 due to the government's tightening policies for the property market. Fitch will continue to monitor the company's ability to deleverage while maintaining its scale. Fair Land Bank Quality: Future Land has sufficient land bank for development activity over the next three to four years, with the attributable land bank held by its subsidiary Future Holdings at 21 million sq m in 1H16. The company has improved its diversification, reducing the percentage of its land bank located in the Yangtze River Delta to around 75% in 1H16, from around 91% in 2013. It expects to reduce the proportion of its land in the Yangtze River Delta to around 65%-70% and expand into the Pearl River Delta region, Central and West China as well as the Bohai Economic Rim. Only 44% of Future Holdings' land bank was located in Tier 1 (Shanghai) and Tier 2 cities (Suzhou, Nanjing and Hangzhou) at end-1H16, with the rest located mainly in the Tier 3 and 4 cities in Jiangsu and Zhejiang provinces. Improving Margins: Fitch expects Future Land's gross margins to remain around 23%-24% and the EBITDA margin to improve to 18%-19% in 2016, from 16.1% in 2015, due to the rising ASP in the Yangtze River Delta since 2H15. Future Land's EBITDA margin is low relative to its 'BB' category peers, as its rapid turnover (which is the highest among 'BB-' rated peers) sacrifices profitability for faster returns for its investment. Margin improvement from 2017 will depend on the rise in the ASP, as it has recently acquired more expensive lands. The average cost of land acquired in 3Q16 increased to CNY6,096/sq m in 1H16, from CNY4,074/sq m; this includes three sites where homebuilders paid record-breaking prices - one plot in Shanghai Hongkou that cost CNY67,000/sq m and two plots in Nanjing Jiangning that cost CNY20,000-22,000/sq m. The average cost of land acquired in 4Q16 moderated to CNY3,575/sq m as Future Land diversified its land bank acquisition to other cities such as Hefei, Taizhou and Changshu where land costs are lower than the Yangtze River Delta region. Structural Subordination Mitigated: Its subsidiary Future Holdings, which is listed in Shanghai, remains a crucial platform for Future Land's offshore financing, especially as the onshore financing environment tightens in 2H16. Future Land has extended a shareholder loan to Future Holdings to ensure sufficient liquidity at the holding company level in the medium term. The loan ranks equally with Future Holdings' onshore senior unsecured debt and can be repaid upon Future Land's demand. Future Land's CNY2.8bn shareholder loan to the subsidiary and CNY11.1bn in unrestricted cash provides a sufficient source of liquidity to cover Future Land's CNY4bn outstanding offshore debt as of end-1H16. The ratio of the shareholder loan to the holding company's net debt was over 0.8x at end-1H16. We will continue to monitor the ratio and expect coverage to increase after Future Land accumulates interest and dividends from Future Holdings. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - contracted sales to grow 8%-10% in 2017-2018 - gross margins to improve to 23%-24% in 2016-2017 - land acquisition to slow 2017 - Future Land maintaining a controlling shareholding in A-share Listco - the ratio of the shareholder loan extended to Future Holdings and JV interest to the holding company's net debt to be higher than 0.7x. RATING SENSITIVITIES Positive: developments that may, individually or collectively, lead to positive rating action include: - contracted sales, excluding JVs, to remain above CNY40bn - contracted sales/total debt sustained above 1.5x - consolidated net debt/adjusted inventory sustained below 40% - EBITDA margin sustained above 18%. - the ratio of shareholder loan extended to Future Holdings and JV interest to the holding company's net debt falling to lower than 0.7x, with no significant decrease in Future Land's shareholding in the Shanghai-listed subsidiary Negative: failure to maintain the positive guidelines will lead to the Outlook being revised to Stable from Positive. LIQUIDITY Sufficient Liquidity: Fitch expects Future Land to maintain sufficient liquidity, with available cash of CNY11.2bn and unutilised credit facilities (uncommitted) of CNY34bn at end-June 2016 to cover repayments on its short-term debt of CNY4.2bn and Fitch-estimated 2016 outstanding land premium of CNY20bn. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 27 October 2016 Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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