Fitch Upgrades Beijing Capital Land to 'BB '; Outlook Stable
The rating upgrade reflects the stronger linkage between BCL and its parent, Beijing Capital Group Company Limited (BCG, BBB/Stable), resulting in a three-notch uplift for BCL's rating compared with a previous uplift of one notch based on Fitch's bottom-up approach in line with its Parent and Subsidiary Linkage rating criteria. However, the standalone profile of BCL has deteriorated, resulting in a lower standalone rating of 'B+' compared with 'BB-' previously.
KEY RATING DRIVERS
Stronger Ties to Parent: BCL has been repositioned as the primary property business platform of BCG, which makes BCL more strategically important to the parent and the two have tighter operational cooperation. Furthermore, BCG has provided direct financial support to BCL over the past year. This includes a keepwell and equity interest purchase undertaking agreement for the CNY1.3bn 5.25% notes issued by Beijing Capital Juda, a 65% owned subsidiary of BCL, and a soon-to-be-completed injection of CNY3bn via subscription of shares in BCL, which will increase BCG's stake in the property company to 63.56% from 45.58%.
BCG previously had four property development subsidiaries, but will consolidate all property assets into BCL in the long run, making it the only property platform for the group. This change will allow BCG to realise the value of its vast land bank through BCL's established property development operation, especially in the Beijing-Tianjin region. The Beijing government's support to BCG can effectively flow to BCL as the government's land injections into BCG will subsequently be developed through BCL.
Weaker Standalone Profile: BCL has continued to execute its fast expansion strategy in 2015, leading to further deterioration in leverage. Leverage, as measured by net debt/adjusted inventory, in 1H15 reached almost 75% (2014: 64%) and EBITDA margin dropped below 10%. (2014: 20%) We expect BCL's leverage to hover around 70% as it continues to expand into 2017, before entering a stable development stage thereafter.
Rapid Expansion: BCL's contracted sales jumped 26.8% to CNY25bn in 2014, compared with an industry average of -8%. Contracted sales in January-September 2015 rose 25% from a year earlier to CNY18.03bn, or 52% of the 2015 target of CNY35bn. BCL's total land premium rose 66% to CNY19.4bn in 2014, with average land cost of CNY7,078 per square metre (sqm). BCL also entered Shanghai in 2014 in a bid to penetrate the Yangtze River Delta Region. We expect BCL to spend CNY25bn a year in the next three years to maintain the pace of expansion and achieve annual contracted sales growth of more than 20%.
Tier 1 City Focus: BCL had a land bank of10.9 million sqm (attributable 8.95 million sqm) at end-2014, among which 80% is residential (including car parks) and almost 50% located in the Bohai Rim region. All the new land purchased in 2014 was in five core cities and Sydney, of which 69% was in Beijing and Shanghai. BCL's Bohai Rim focus complements its role in developing BCG's vast land bank in the region. The resilience of property prices in these cities will also help BCL maintain EBITDA margin at between 15% and 20%, This trend will allow BCL to deleverage quickly from 2018 as the company moves to a stable development stage and reaches a scale where it can help BCG complete the development of its land bank.
Sufficient Liquidity: BCL had CNY13.9bn cash (of which CNY3bn was restricted cash) and CNY37.2bn undrawn bank facilities at end-2014. We believe the company has enough liquidity because of its diversified funding channels from both onshore and offshore capital markets. BCL had an average funding cost of around 7.2% in 2014. We expect BCL to be able to lower funding cost by 0.5pp in 2015, with the help of lower-cost onshore funding and refinancing of higher-cost offshore bonds and perpetual securities.
Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales reach CNY35bn in 2015 and growth rate of around 20% in 2016-2018.
- Land acquisitions of around CNY25bn each year in 2015-2018, excluding land injections from the parent.
- EBITDA margins to drop in 2015 to below 10% but stay around 20% afterwards
- Perpetual bonds treated as minority interests are reclassified as debt
- No valuation gains assumed
- Interest expenses in the forecast periods are not capitalised
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/adjusted inventory leverage sustained above 75%
- Contracted sales/gross debt sustained below 0.8x (0.6x in 2014)
- EBITDA margin falling below 15% on a sustained basis
- Any signs of weakening linkage with its parent BCG
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Net debt/adjusted inventory leverage sustained below 65%
- Contracted sales/gross debt sustained above 1x
- EBITDA margin rising above 20% on a sustained basis
The full list of rating actions is as follows:
Beijing Capital Land Limited
- Long-Term Foreign-Currency IDR upgraded to 'BB+' from 'BB'; Outlook Stable
- Long-Term Local-Currency IDR upgraded to 'BB+' from 'BB'; Outlook Stable
- Senior unsecured rating upgraded to 'BB+' from 'BB'
Issued by Central Plaza Development Ltd and guaranteed by BCL
- 7.6% CNY2bn senior notes due 2015 upgraded to 'BB+' from 'BB'
- 5.75% CNY3bn senior notes due 2017 upgraded to 'BB+' from 'BB'
- 6.875% CNY250mn senior notes due 2019 upgraded to 'BB+' from 'BB'
- USD1bn medium-term note programme upgraded to 'BB+' from 'BB'