Fitch Ratings has affirmed the ratings on China-based homebuilder Hong Yang Group Company Limited and its subsidiary Redsun Properties Group Limited at 'B+' with a Stable Outlook.
Fitch rates both companies on a consolidated basis, according to our Parent and Subsidiary Linkage Rating Criteria, as Fitch assesses the overall linkage as moderate.
The affirmation reflects the group's growing contracted sales, improving land-bank diversification and its ability to maintain modest leverage at around 40%, based on proportionately consolidated net debt/adjusted inventory. The group's ratings are constrained by its attributable sales and revenue scale, which are smaller than that of 'BB-' rated peers, while its EBITDA margin is also weaker than majority of peers rated 'B+'.
KEY RATING DRIVERS
Healthy Leverage: Fitch believes group leverage, measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, will rise to around 40% in 2021 (2020: 35%), which remains reasonable among 'B+' rated peers. The group expects to spend about half of its contracted sales proceeds on land in 2021, similar to that in 2020. The group has been able to control its leverage at a healthy level while expanding its scale over the past two years.
Short Land Bank Life: The group's land-bank life of around two years at end-2020 - defined by saleable land bank at end-2020 divided by expected gross floor area (GFA) sold in 2021 - is shorter than that of 'B+' and 'BB-' peers. Therefore, we believe the company will constantly seek to acquire land to sustain contracted sales growth, which may lead to an increase in leverage. Fitch expects leverage to rise to about 40% in 2021 due to higher land acquisition outflow in 2021.
Sales Continue to Rise: Fitch expects the group's total contracted sales to rise by about 15% to CNY100 billion in 2021. The group's total contracted sales were about CNY40 billion in January-May 2021, and rose 33% to CNY86.5 billion in 2020, driven by its sufficient saleable resources, mainly in Jiangsu province and other cities in the Yangtze River Delta, where demand is resilient. The group's attributable sales and revenue of CNY43 billion and CNY20 billion, respectively, were both smaller than that of 'BB-' rated peers which were above CNY55 billion and CNY30 billion, respectively, in 2020.
Margin to Stabilise: We expect the group's EBITDA margin, after adding back capitalised interest in cost of goods sold, to stabilise at about 18% in 2021. The EBITDA margin fell to 17% in 2020 from 18% in 2019, due to weaker margin in property development as the industry was increasingly competitive. Fitch expects the gross profit margin (before capitalised interest adjustment) for property development to stabilise at about 21% in 2021, as 35%-40% of the group's land acquisitions are from integrated projects and acquisitions, which have higher profitability than land from public auctions. Fitch also expects the selling and administrative expense/revenue ratio to drop as revenue increases.
Increasing NCI: The ratio of Hong Yang's non-controlling interests (NCI) to equity, excluding the NCI due to listed subsidiaries, increased to 30% in 2020 from 20% in 2019. This reflects Hong Yang's reliance on cash from contracted sales and capital contributions from non-controlling shareholders, which are mainly developers, to finance its expansion. This lowers Hong Yang's need for debt funding, but creates potential cash leakage and reduces further financial flexibility because homebuilders with lower NCIs can dispose of stakes in projects to reduce leverage.
Moderate Parent-Subsidiary Linkage: Fitch rates Hong Yang Group and Redsun on a consolidated basis, according to our Parent and Subsidiary Linkage Rating Criteria, as Fitch assesses the overall linkage as moderate, reflecting weak legal ties and moderate operational ties. Hong Yang Group holds 72% of Redsun, which represents the group's entire exposure to the China homebuilding business. The chairman of Redsun is the sole director of Hong Yang Group.
The group's leverage of 35% at end 2020 is similar to that of Zhenro Properties Group Limited (B+/Positive). However, the group's attributable contracted sales scale of CNY43 billion is smaller than Zhenro's CNY78 billion. The group's EBITDA margin, after adding back capitalised interest, at 17% is weaker than Zhenro's 22%.
Peers rated at 'BB-' generally have attributable contracted sales of more than CNY55 billion and revenue of more than CNY30 billion. The group's attributable contracted sales of CNY43 billion and revenue of CNY20 billion in 2020 is smaller than that for 'BB-' peers.
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Total contracted sales by gross floor area to increase by 5% per year in 2021 -2024
Contracted average selling price to increase by 8% in 2021, 5% in 2022 and 3% in 2023-2024
Property-development gross profit margin of about 21% in 2021-2024
Land-acquisition cash outflow to account for about 50% of annual pre-sales proceeds in 2021-2024
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Attributable contracted sales and revenue comparable with that of 'BB-' peers
Leverage, measured by proportionately consolidated net debt/adjusted inventory, sustained below 40%
No decrease in land bank life (defined by saleable land bank as of year-end divided by expected gross floor area sold in the next year)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA margin, excluding capitalised interest from cost of goods sold, sustained below 18%
Leverage, measured by proportionately consolidated net debt/adjusted inventory, sustained above 50%
All ratios are based on the parent's - Hong Yang Group - consolidated financial data.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: The group had available cash balance of CNY14.1billion, excluding restricted cash and pledged deposits of CNY2.9 billion and CNY3.4 billion, respectively, sufficient to cover its short-term borrowings of CNY13.1 billion at end-2020. Hong Yang Group, on a standalone basis (excluding Redsun), had available cash of CNY1.7 billion, which covers its short-term borrowings of CNY1.7 billion.
At end-2020, Redsun had available cash balance of CNY12.4 billion, excluding restricted cash and pledged deposits of CNY2.9 billion and CNY3.3 billion, respectively, sufficient to cover its short-term borrowings of CNY11.4 billion.
In January 2021, Redsun issued USD350 million of 7.3% senior notes due 2025. It repaid its USD300 million 11.50% senior notes due March 2021. In May 2021, it also issued USD210 million of 7.3% senior notes due 2024. The proceeds will be used to refinance its USD100 million notes due in October 2021.
Hong Yang Group is the parent company and owns 72% of Hong Kong-listed Redsun. Hong Yang Group's founder, Mr Zeng Huansha, started the property development business in 2001. Hong Yang Group (excluding Redsun) has a property management services company, which was separately listed in Hong Kong in July 2020, as well as a large retail and wholesale centre for home decoration materials and furniture in Nanjing, Jiangsu Province.
Redsun focusses on developing residential properties in Jiangsu province and has expanded into other regions. It also operates retail malls, offices and hotels.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch's calculation of CNY 58.4 billion of adjusted inventory used in the leverage calculations includes: CNY52.3 billion in property under development and inventory, CNY0.7 billion in prepaid land use rights, CNY21.5 billion in investment properties, CNY0.3 billion in property, plant and equipment (land and buildings), JV adjusted inventory of CNY13 billion, less CNY0.2 billion in net amount due to non-controlling interests and CNY29.4billion in contract liabilities.
Fitch included JV net debt of CNY2 billion in net debt in the proportionately consolidated leverage calculation.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Redsun Properties Group Limited LT IDR B+ Affirmed B+
LT B+ Affirmed RR4 B+
Hong Seng Limited
LT B+ Affirmed RR4 B+
Hong Yang Group Company Limited LT IDR B+ Affirmed B+
LT B+ Affirmed RR4 B+
VIEW ADDITIONAL RATING DETAILS
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