OREANDA-NEWS. Fitch Ratings has assigned China-based property developer Greenland Holding Group Company Limited's (Greenland; BB+/Negative) USD450m 3.875% senior notes a final 'BB+' rating.

The notes are issued by its 59.07%-owned subsidiary Greenland Hong Kong Holdings Limited (Greenland HK) under its USD2bn medium-term note programme. Greenland has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that Greenland HK has sufficient assets and liquidity to meet its debt obligations.

The notes are rated at the same level as Greenland's senior unsecured rating because they constitute direct, unsubordinated and senior unsecured obligations of the company. The final rating is in line with the expected rating assigned on 15 July 2016.

KEY RATING DRIVERS

Deteriorating Financial Metrics: Greenland's leverage rose to 66% at end-2015 from 62% at end-2014 due to weaker cash collection. This level of leverage is comparable with Fitch-rated China homebuilders rated in the mid-to-high 'B' category. We believe Greenland's leverage may stay in the high-50% range even after receiving payment in 2017 for the bulk of its uncollected sale proceeds. This is because it had relied on supplier credit for its inventory build-up and this may reverse in 2017 upon project completion. Greenland's operating efficiency, as measured by total contracted sales/total debt, decreased to 1.0x in 2015 from 1.3x in 2014 due to higher debt.

Slow Sales Collection: Fitch estimates that Greenland's cash collection rate in 2015 was only 59%, slightly higher than 58% in 2014, but far behind the industry average of above 80%. This is mainly because almost 50% of its contracted sales are from commercial properties, where cash collection is much slower than that of residential property sales and exposes Greenland to payment delays from small and medium enterprises, which have been hit harder by China's slower economic growth and the downturn in the commodity market.

Residential property developers typically collect the full sales amount within three months of sales, but commercial property developers collect 50% of the sales in the first year and have to wait until delivery - usually three to five years after sales - to collect the balance. Greenland's cash collection rate for residential sales is also below the industry average.

Deleveraging Hinges on 2017 Collection: Greenland's high leverage is mitigated by the sizable off-balance-sheet uncollected sales proceeds from both residential and commercial property sales, which exceeded its annual sales at end-2015. Sales from commercial properties surged in 2014 and 2015, and management expects cash collection to significantly improve in 2017 when these projects are delivered. Leverage is likely to trend down towards 55% if the expected collection materialises.

Non-Property Businesses Drive Leverage: Fitch believes Greenland's non-property businesses are still immature and need to be funded with cash flow from the company's property business. Greenland has made extensive investments in financial institutions, consumer goods and infrastructure industries in 2015, which contributed to the increase in Greenland's leverage. In addition, Greenland's smaller equity placement in 2016 means it may need to fund a CNY10bn investment in the financial institutions business via internal cash or external debt, which will increase leverage further.

Benefits of Large Scale: Greenland is the second-biggest property developer in China by contracted sales, trailing only China Vanke Co., Ltd. (BBB+/Stable). Greenland had contracted sales of CNY230bn in 2015, down 4% from 2014. The company's property development business is well diversified over 40 cities in China and overseas. Greenland's management says it intends to sustain a property contracted sales of over CNY200bn in the next few years.

Diversified Funding Channels: Greenland has enhanced its onshore funding channels after gaining a listing on the Shanghai stock exchange in July 2015 by injecting assets into a listed company. Greenland plans to place out shares in this listed entity, although in May 2016 it reduced the amount to be raised to CNY15.7bn from CNY30bn. Greenland in March 2016 also announced it is exploring injecting its hotel assets into a hospitality REIT that may be listed on the Singapore Exchange. In early 2016, Greenland completed a CNY10bn domestic bond issuance to augment its funding needs and reduce its borrowing costs. The company also established offshore funding channels through its 59%-owned subsidiary Greenland Hong Kong Holdings Limited.

Rating Uplift for Parental Support: Greenland has a moderately strong linkage with the Shanghai government. It will continue to be one of the major contributors to Shanghai's tax revenue and remain the largest Shanghai-based property company. Fitch believes the Shanghai State-owned Assets Supervision and Administration Commission, which owns 46% of Greenland, will continue to be the company's biggest shareholder and exert significant influence on Greenland's ability to acquire quality sites for development; even though its stake is likely to fall after the company's planned share placement in 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Greenland include:

- Contracted sales to fall 22% in 2016 and remain flat in 2017-2018.

- Sales of commercial property to form 60% of total sales and residential sales will make up the remainder in 2016-2018

- Land premium of around CNY60bn-65bn in 2016-2018, or around 35% of current year contracted sales. Assume cash is paid out in the same year as incurred.

- CNY15.7bn to be raised via share placement in 2016.

RATING SENSITIVITIES

Positive: The Outlook for the standalone ratings may be revised to Stable if the negative guidelines are not met in the next 12 months.

Negative: Future developments that may, individually or collectively, lead to negative rating action on the ratings include:

- Net debt/adjusted inventory sustained above 60% (Fitch estimate for 2015: 66%)

- Property EBITDA margin sustained below 15% (Fitch estimate for 2015: 17%)

- Contracted sales/total debt sustained below 1x (Fitch estimate for 2015: 1.0x)

- Evidence of weakening support from parent

In arriving at debt ratios for the property segment, Fitch allocates a part of the company's debt to its energy business to maintain the latter's net working capital/net debt ratio at 1.5x and the rest of the debt to the more profitable property business.