OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) of China Properties Group Limited (CPG) to 'CCC' from 'B-'. CPG's senior unsecured rating and the rating on its outstanding USD250m senior notes have also been downgraded to 'CCC' from 'B-', with a Recovery Rating of 'RR4'.

The downgrade reflects CPG's lack of a contracted sales track record and not reaching sales targets communicated to Fitch. CPG's lack of operational cash flow provides limited visibility of its ability to meet debt-servicing obligations.

KEY RATING DRIVERS

Inadequate Contracted Sales. CPG had less than HKD300m contracted sales in each of 2013 and 2014 as well as limited sales in 1H15. This is despite carrying HKD450m in completed inventory and a growing number of properties under development for sale, totalling HKD5.7bn at end-June 2015. Fitch expects contracted sales to increase to around HKD800m in 2016, as the company launched phase 3 of its Chongqing Manhattan project in March 2016 and restarted selling its Shanghai Concord project in late 2015. However, contracted sales would remain limited, merely covering operational costs.

Lack of Operational Depth. CPG generated limited recurrent rental income of HKD1m in the six months ended June 2015, despite holding investment properties with a carrying value of over HKD60bn. Most of CPG's properties are located in prime locations of downtown Shanghai and Chongqing, which kept its total debt to property asset-carrying value ratio as low as 12% (total debt excluding shareholder's loan). However, Fitch considers the prime locations of its properties alone insufficient to support the company's business profile, given its lack of operating performance.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- achieving contracted sales of HKD800m after launching phase 3 of Chongqing Manhattan and restarting selling its Shanghai Concord project
- refinancing the majority of its HKD1.67bn short-term debt, as it consists of secured borrowings backed by CPG's key property assets, which Fitch does not expect to depreciate in the next 12 months
- no new land acquisition in 2016
- limited development expenditure in 2016

RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- contracted sales of over HKD3bn per year on a sustainable basis and the company undertaking reasonable project developments

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- a deterioration in CPG's liquidity

LIQUIDITY

Tight Liquidity Position. Fitch assumes most of CPG's liquidity will come from debt refinancing and shareholder loans. This is due to uncertainty as to how much cashflow can be generated by contracted sales,

CPG's onshore borrowings, excluding shareholder loans, are secured and amounted to around HKD5.6bn at end-1H15. CPG pledged assets with an aggregate carrying value of over HKD50bn to secure these onshore debts. Based on this, if the pledged assets in Shanghai and Chongqing do not depreciate, Fitch expects that CPG would be able to refinance its secured borrowings.

Repaying the USD250m offshore unsecured notes is more uncertain compared with CPG's onshore secured debts, although the company still had unpledged property assets at end-1H15 with a total carrying value of HKD15bn that could allow it to raise additional secured debt.

FULL LIST OF RATING ACTIONS

Long-Term Foreign-Currency IDR downgraded to 'CCC' from 'B-'
Long-Term Local-Currency IDR downgraded to 'CCC' from 'B-'
Senior unsecured ratings downgraded to 'CCC' from 'B-'; Recovery Rating of 'RR4'USD250m 13.5% senior unsecured notes due 2018 downgraded to 'CCC' from 'B-'; Recovery Rating of 'RR4'