OREANDA-NEWS. Fitch Ratings has revised the Outlook on China Properties Group Limited's (CPG) ratings to Negative from Stable, and has affirmed its Long-Term Foreign Currency and Local Currency Issuer Default Rating (IDRs) at 'B-'. Fitch has also affirmed the company's senior unsecured rating at 'B-' with Recovery Rating at 'RR4'.

The Outlook revision to Negative reflects the company's current tight liquidity position, which is mainly due to very limited cash inflow from contracted sales in past three years, a HKD2bn debt repayment that falls due 2015, and significant planned development expenditure in the next 12 to 24 months.

Key risks that may result in insufficient liquidity at the company include refinancing risk for maturing debt, execution risk in selling completed projects, and a call to repay a shareholder's loan without any improvement in the company's operating cash flows.

KEY RATING DRIVERS
Limited Sales Record: CPG plans to speed up its project construction as well as contracted sales in 2015 and 2016. However, there is significant risk in the execution of its strategy to meet its sales target of CNY4bn in 2015 and CNY7bn in 2016, because of its very limited sales track record. In 2014, CPG generated contracted sales of CNY80m, much less than the CNY200m in 2013 and CNY639m in 2012, both of which were already lower than contracted sales of its 'B' rated peers. CPG's total gross floor area sold in 2014 was 9,400 sqm, 90% of which was from the Chongqing Manhattan project.

Short-term Liquidity Concern: CPG had limited cash inflow from contracted sales in 2014 but a large amount of debt repayable in 2015. About CNY1.78bn of onshore loans mature in 2015, of which CNY950m is repayable in the first half. CPG is currently negotiating with local banks on refinancing plans, and success in obtaining over CNY1bn in loans before June 2015 is essential for CPG to maintain sufficient operational liquidity.

High Capex Needs: While CPG settled all the land premiums for existing projects more than five years ago at low costs, it has aggressive development plans in 2015-2017, with significant development expenditure, which the management estimates at over HKD5bn. The company is positioning SH Concord and SH Cannes as high-end integrated projects, pushing up the unit development costs above peers' projects. The construction cost for retail properties at the two projects will be more than CNY20,000 per sqm, and for residential properties at around CNY3,000 per sqm. Fitch expects the company's total debt to rise further unless it successfully realises significant cash inflow from property pre-sales.

Prime Locations: CPG's financial flexibility is mainly provided by the large amount of unpledged investment properties located in prime locations in downtown Shanghai and Chongqing. The investment properties generate only limited recurrent income, while they were valued at HKD59bn at end-2014. Although CPG's total debt increased more than 40% in the past two years, Fitch estimates its leverage, measured by net debt/adjusted inventory after excluding market revaluation of investment properties, at less than 30% at end-2014.

Shareholder Support: CPG's chairman and 75% shareholder, Wong Sai Chung, has provided significant financial support by subscribing to HKD500m of convertible notes, and providing shareholder's loans with outstanding balance of HKD1.39bn as of end-January 2015. Given the significant amount, the shareholder's loans are important to the company's financial position. While the shareholder's loans are classified as repayable upon demand, Fitch believes CPG will take into account its cash flow position before repaying the loans.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- CPG successfully obtaining enough refinancing and project development loans
- Fully achieving its contracted sales target in 2015, and over 80% of its sales target in 2016
- Aggressive development plan with significant expenditure in the next 24 months
- CPG positioning SH Concord and SH Cannes as high-end integrated projects, resulting in higher unit development costs than that at its peers

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Deterioration in CPG's liquidity position, which may be as a result of failure to refinance maturing debt
- Failure in reaching 40% of its contracted sales target in 2015 under the current development expenditure plan
- Repayment of shareholders' loans without any improvement in the company's operating cash flows

Positive: Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include:
- Contracted sales of over HKD5bn and recognised revenue of over HKD3bn while sustaining current strong financials.
- No single project accounting for over 70% of total sales.