OREANDA-NEWS. Red Star Macalline Group Corporation Ltd. (RSM) still maintains a healthy leverage ratio (as measured by net debt/recurring EBITDA) estimated at 3.9x as of end-2015 despite the lower-than-expected revenue growth from the managed mall business, says Fitch Ratings. The rating continues to be supported by an intact hybrid business model of owning malls and managing malls it does not own - which enables RSM to expand with little capital outlay and minimum investment risk.

RSM's managed malls are progressing slower than expected, due to its exposure in 3rd/4th tier cities. This is because the tight capital situation of property developers in lower-tier cities delayed their construction pace and constrained their ability to honour the contract payment to RSM on time. The slower expansion from managed malls might subdue RSM's one-off income from the initiation, entrance and consultation fees that it collects from developers. However, the recurring EBITDA, which includes recurring rental from its self-owned malls and management fees from managed malls, will continue to grow.

Fitch estimates that 2015 recurring EBITDA increased by 13% to CNY2.9bn and will reach CNY5bn by 2018, driven by its solid owned portfolio and an increased base of managed malls. In 2015, RSM signed approximately 100 new mall management contract with local developers, bringing in the total pipeline of managed shopping malls to 440, of which 240 had secured land parcels.

RSM reported an EBITDA of CNY4.3bn in 2015, + 9.6% yoy with a healthy EBITDA margin of 49.5%. The majority of the recurring income (up to 90%) still derives from RSM's well-run owned portfolio, which recorded 7.7% growth in rental revenue and a wider EBIT margin of 51.6% (FY14: 48.9%) in 2015. Average rental rate for mature malls (opened for 24 months) continued to gain momentum in 2015, +6% yoy. Its monthly rate of CNY152/sq m is higher than for most of the mall operators in China.

RSM's credit profile is still supported by its position as the No.1 home improvement and furnishing mall operator in China, and its strong financial profile supported by its growing recurring income. In the meantime, RSM is seeking different funding options through both a proposed A-share listing of no more than CNY3.95bn and short term domestic bond of CNY3bn to optimise its capital structure and lower funding costs. Leverage will be driven down if the A share IPO is successful.