Fitch: Jingrui's Leverage Remains High, Land Quality Improving
Deleveraging will be difficult as land prices continue to climb in the cities where the company is focused. However, Jingrui's efforts to establish a JV partnership for its newly obtained projects will help alleviate the financing burden. The company has made progress in reducing its funding costs by using the proceeds from its onshore bond issuance to repurchase some of its higher-cost offshore bonds. Land quality has also improved following aggressive repositioning in recent years, which should enhance future sales and profitability.
Fitch expects Jingrui's sales to expand to CNY12bn-13bn in 2016 from CNY8bn-9bn per year in the last three years. This is because the company is clearing inventory in lower-tier cities in the Yangtze River Delta region with slower churn to gradually shift its focus to higher-tier cities. Contracted sales in 1H16 increased by 110% yoy to CNY6.1bn, driven mainly by sales in Shanghai, Hangzhou, Ningbo and Suzhou.
However, management's appetite for expansion has pulled ahead of the rise in sales, with land-acquisition costs in 2016 likely to reach 55%-60% of contracted sales, compared with management's guidance of 40%-50% in 1Q16. Fitch expects free cash flow to remain negative as land payments and construction costs together represented more than 90% of contracted sales in 2016, compared with 99% in 2015 and 124% in 2014. The company's plan to co-develop some of its newly obtained projects with JV partners will help alleviate the financing needs.
Jingrui's net debt/adjusted inventory had climbed to 60% by end-1H16 from 56% at end-2015. Land acquisitions worth CNY6.9bn so far in 2016 after CNY4.1bn of land purchases in 2015 have put further pressure on leverage and left it with almost no headroom for further expansion. Fierce competition in Jingrui's core cities is driving up land prices, which will push land acquisition costs higher and keep leverage elevated. Housing demand has picked up in these cities from the end of 2015, but Jingrui will only be able to deleverage if average selling prices rise significantly and it reduces land acquisitions.
Jingrui's liquidity position remains tight with its ratio of cash to short-term debt at 76% at end-1H16, compared with 63% at end-2015. Total cash of CNY4.35bn and undrawn credit facilities of CNY3.24bn at end-1H16 are insufficient to cover its short-term borrowings of CNY5.65bn and land-acquisition costs. This can be alleviated if its contracted sales remain strong and it maintains a high cash-collection rate.
Jingrui has been repurchasing its offshore bonds with proceeds from its lower-cost onshore issuance. This has reduced its borrowing cost to 9.32% at end-1H16 from 9.68% at end-2015, and the company is likely to continue to use low-cost financing to replace high-cost financing after it issued CNY1.5bn of public bonds in March 2016 and CNY1bn of non-public bonds in September. Jingrui has so far repurchased USD121m of its offshore 2018 and 2019 bonds, leaving USD179m outstanding.
Jingrui's EBITDA margin remained under pressure at 0% in 1H16, after its worst showing of -0.1% in 2015, when it recognised revenue from projects in Tier 3 and 4 cities with low selling prices and low-margin projects in Suzhou, Hangzhou, and Ningbo that were pre-sold in the last two years. Fitch expects Jingrui's gross margin to remain in the low single digits for 2016, and improve to 15%-20% in 2017 due to a sharp rise in selling prices in Suzhou, Hangzhou, and Ningbo. However, this improvement could be jeopardised if land-acquisition costs sprint ahead of the rise in selling prices, which is capped by government policy tightening in cities where prices have risen rapidly, such as Suzhou and Hangzhou.
Jingrui's land bank has gradually improved after it turned its focus to higher-tier cities to drive contracted sales growth. The company's total attributable land reserve by gross floor area was 3.8 million square metres at end-1H16, of which 70% is in Tier 1 and 2 cities. We expect Jingrui's turnover to gradually improve in the next two years because more than 80% of its saleable resources are in Tier 1 and 2 cities, where the increase in selling prices has accelerated since the end of 2015.