OREANDA-NEWS. Fitch Ratings has affirmed Greenland Holding Group Company Limited's (Greenland) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-', and revised its Outlook to Negative from Stable. Fitch has also affirmed Greenland's senior unsecured rating and the ratings of all outstanding bonds at 'BBB-'.

The affirmation of the IDR follows the downgrade of Greenland's standalone rating to 'BB+' from 'BBB-' and the incorporation of a one-notch uplift reflecting its moderately strong linkage with its parent, the State-owned Assets Supervision and Administration Commission (SASAC) of Shanghai Municipality, in line with Fitch's Parent and Subsidiary Linkage criteria. The uplift was not previously applied as the support was not deemed strong enough to enhance a standalone investment-grade rating.

The downgrade of the standalone rating is driven by Greenland's poor cash collection rate from its contracted sales, which has resulted in a persistent increase in its debt level. We expect Greenland's leverage, as measured by net debt-to-adjusted inventory, to hover around 60% in 2015 to 2017, up from 55% at end-2014. Furthermore, sales will come under pressure from weak demand for China's commercial properties, particularly given the company's relatively high reliance on this segment. Greenland's non-property business initiatives are at an early stage of development and require significant initial investment outlay, which will also push up Greenland's overall leverage level.

The Negative Outlook reflects our belief that deterioration in Greenland's financial profile can only be alleviated by management's efforts to significantly improve its cash collection rate. Failure to execute such a plan from 2016 may result in further negative rating action.

KEY RATING DRIVERS
Uncollected Cash Drives Higher Leverage: We estimate that Greenland's cash collection rate in 1H15 was only 68% (CNY56bn collected from CNY82.7bn in contracted sales), higher than 56% in 2014, but far behind the industry average of above 80%. This is mainly because Greenland generated almost 50% of its contracted sales from commercial properties, where cash collection is much slower than that of residential property sales.

Unlike residential property developers, which typically collect the full sales amount within three months of sales, commercial property developers collect 50% of the sales amount during the first year and have to wait until delivery - up to three years after sales - to collect the balance. The long collection period exposes Greenland to payment delays from some small and medium enterprises, as they are disproportionately impacted by China's slower economic growth and the slowdown in the commodity market. Greenland's cash collection rate for residential development is also below the industry average.

Deteriorating Financial Metrics: We expect Greenland's leverage to increase to 58% at end-2015 from 55% at end-2014, driven by its weak cash collection rate. This level of leverage is comparable with Fitch-rated China homebuilders rated in the mid-to-low 'BB' category. Greenland's operating efficiency, as measured by total contracted sales/total debt, is likely to decrease to 1.0x in 2015 from 1.4x in 2014 due to higher debt.

Greenland expects to sustain contracted sales of around CNY200bn a year in 2016 and 2017, down from the peak of CNY240bn in 2013, due mainly to the weakening commercial property market. We estimate that the company needs to spend above CNY60bn each on land acquisitions and construction to sustain annual sales of CNY200bn. Therefore, leverage and operating efficiency are likely to remain around the 2015 levels unless the company is successful in significantly improving its cash collection rates.

Non-property Businesses Drive Leverage: Fitch believes that Greenland's non-property businesses are still immature and will need to be funded with cash flow generated from the company's property business. Greenland has strived to shrink its higher-leveraged energy trading business, but Greenland has made extensive investments in the financial institutions, consumer goods and infrastructure industries in 2015. All these have contributed to the increase in Greenland's leverage.

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 in over 40 cities in China and overseas. Greenland 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. It quickly announced a share placement in December 2015 to raise CNY30bn in 2016. Furthermore, Greenland has completed a CNY10bn domestic bond issuance in early 2016. The company also has established offshore funding channels through its 59%-owned subsidiary Greenland Hong Kong Holdings Limited.

One Notch Parent 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 SASAC, 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 our rating case for the issuer include:
- Contracted sales to fall 12% 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 CNY70bn in 2016-2018, or around 35% of current year contracted sales. Assume cash is paid out in the same year as incurred.

RATING SENSITIVITIES
Positive: The Outlook for the ratings may be revised back 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%
- Property EBITDA margin sustained below 15% (Fitch estimate for 2014: 15%)
- Contracted sales/total debt sustained below 1x
- Further rise in leverage in non-property businesses
- Evidence of weakening support from parent

In arriving at property-segment debt ratios, 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.

FULL LIST OF RATING ACTIONS
Greenland Holding Group Company Limited
- Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook revised to Negative from Stable
- Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook revised to Negative from Stable
- Senior unsecured rating affirmed at 'BBB-'
- USD3000m medium-term note programme affirmed at 'BBB-'
- USD2000m medium-term note programme affirmed at 'BBB-'

Issued by Greenland Hong Kong Holdings Limited with keepwell from Greenland Holding Group Company Limited
- USD700m 4.75% senior notes due 2016 affirmed at 'BBB-'
- USD500m 4.375% senior notes due 2017 affirmed at 'BBB-', with additional equity interest undertaking agreement from Greenland Holding Group Company Limited
- CNY1.5 bn 5.5% senior notes due 2018 affirmed at 'BBB-'

Issued by Greenland Global Investment Limited and guaranteed by Greenland Holding Group Company Limited
- USD500m 3.5% senior notes due 2017 affirmed at 'BBB-'
- USD400m 3.75% senior notes due 2019 affirmed at 'BBB-'
- USD600m 5.875% senior notes due 2024 affirmed at 'BBB-'