Fitch Rates Times Property's Proposed USD Senior Notes 'B (EXP)'
The notes are rated at the same level as Times Property's senior unsecured rating because they are regarded as direct and senior unsecured obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received.
Times Property intends to use the proceeds from the issuance to refinance part of its existing borrowings and fund its existing and new property development projects and for other general corporate purposes. As end of December 31, 2014, Times Property had total outstanding borrowings of CNY10.8bn, of which CNY1.8bn would be due within one year, versus CNY2.7bn cash on hand and CNY2.7bn restricted bank deposits. The weighted borrowing cost was estimated at 12.8% in 2014.
Times Property is a pure residential property developer targeting first-time home-buyers and upgraders in Guangdong province. Its ratings are supported by its low cost of land bank, its contracted sales scale, its urban redevelopment project pipeline in Guangzhou and its improving capital structure. The ratings are constrained by its high leverage and its geographical concentration in the Guangdong province.
KEY RATING DRIVERS
Good Land Bank Quality: Times had a total land bank size of 9.4m sqm as at end 2014. The company's land bank is of good quality as reflected by its project locations and low unit costs. In 2014, as much as 70% of the company's contracted sales came from Guangzhou and Foshan in Guangdong province. Fitch estimated that about half of Times' sellable resources are located in these two cities, where the end-user demand is the strongest and most stable in Guangdong. Given the low land bank cost and the future acquisition of urban redevelopment projects, we believe Times can maintain a gross profit margin of 30%.
Sustainable Land Bank Drives Growth: Times is in negotiations for 20 urban redevelopment projects in Guangzhou that could be converted to its land bank in the future. This could enhance its product mix and profitability, so as to support its future sales growth. As of June 2014, Times has converted one urban redevelopment site, while the conversion of two other sites is in progress. Fitch believes that Times' land bank can support its sales performance, as reflected by its 2014 contracted sales of CNY15.2bn, compared with CNY11bn in 2013.
Improving Capital Structure: Times has been optimising its capital structure in 2014 by diversifying funding channels and reducing effective borrowing costs. The company repaid some of its trust loans that have higher interest costs and issued longer-tenor offshore bonds at lower rates. It is one of the most active offshore bond issuers in the 'B' rating category, issuing four tranches of US dollar and Chinese yuan bonds in the last nine months amounting to USD550m.
Geographical Concentration in Guangdong: Times is a regional property developer focused on Guangdong with exposure in Guangzhou, Foshan, Zhuhai, Zhongshan and Qingyuan. It also has some operations in Changsha in Hunan province. The company's geographical concentration and scale constrain the ratings. We believe that Times will concentrate on expanding its size within Guangdong province and is unlikely to expand into other provinces before solidifying its position in its home province.
High Leverage During Expansion: Times' leverage is likely to remain at an above-average level as the company is expanding. However, given the company's disciplined land acquisition strategy and its modest growth target, we believe that leverage will not reach excessively high levels. We expect Times' leverage, as measured by net debt divided by adjusted inventory, to remain at 40%-50% in 2014-2015.
Sufficient Liquidity to Repaying Debt: At end 2014, Times had cash and cash equivalents of CNY2.7bn and restricted bank deposits of CNY2.7bn. The company also has a good track record in accessing the capital market. Hence, we believe that Times has sufficient liquidity to cover its short term debt of CNY1.8bn.
Negative: Future developments that may, individually and collectively, lead to negative rating action include:
- Net debt/adjusted inventory sustained above 50%
- Contracted sales/total debt sustained below 1x
- Annual contracted sales falling below CNY12bn
- EBITDA margin sustained below 15%
Fitch does not expect further positive rating action until Times significantly increases its scale and diversifies geographically.