OREANDA-NEWS. September 07, 2015. Fitch Ratings has affirmed China-based Guangzhou R&F Properties Co. Ltd.'s (Guangzhou R&F) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB'. The Outlook is revised to Negative from Stable. Fitch has also affirmed Guangzhou R&F's senior unsecured rating, the ratings on its outstanding notes and ratings on notes issued by subsidiaries at 'BB'. The full list of rating actions is at the end of this commentary.

The Outlook revision reflects Fitch's expectation that Guangzhou R&F will need until 2017 to bring its leverage ratio, as measured by net debt to adjusted inventory, to below 50%. This compares with the previous expectation that this will happen in 2015. Contracted sales in 1H15 were slower than expected and leverage will remain above 55% in 2015 and above 50% in 2016. The company is slowing down its land acquisitions, which is driving the deleveraging. The ratings are supported by the home builder's superior EBITDA margins of close to 30%, large business scale with contracted sales at CNY54.4bn, and its well-diversified land bank in Tier 1 and 2 cities.

KEY RATING DRIVERS

High Leverage to Continue: Guangzhou R&F's leverage peaked at 61.3% in December 2014, and fell to 57.9% in 1H15. The high leverage was due to the aggressive land acquisitions worth CNY43bn in 2013, while contracted sales in 2013 were only CNY42.3bn. Guangzhou R&F's land bank increased 51% to 43.3m sqm in 2013 from 28.6m sqm in 2012.

Deleveraging to Begin in 2016: Fitch expects Guangzhou R&F leverage to remain stable for 2015 and further decrease to below 55% in 2016. The deleveraging will be driven by slower land acquisitions and stable contracted sales. Guangzhou R&F estimates that its annual land premium will be around CNY8bn-10bn in 2015-2017, which is around 20% of its yearly contracted sales, much less than the 100% in 2013.

Superior EBITDA Margin: Guangzhou R&F's EBITDA margin is higher than that of its 'BB' category peers of 20% to 25%. Guangzhou R&F's EBITDA margin was 28.3% in 2014, and was at 33%-36% in 2011-2013. The lower margin in 2014 was due to the smaller proportion of commercial property sales in the revenue mix. Commercial property sales accounted for 6% of its total revenue in 2014, compared with 33% and 15% in 2013 and 2012 respectively.

Reached Critical Mass: Guangzhou R&F's contracted sales reached CNY54.4bn in 2014, after increasing around 25% a year from CNY34.2bn in 2012. The company's contracted sales are comparable with that of other Chinese homebuilders rated at similar levels, and give it economies of scale. We expect the company's contracted sales to increase in single digits in the next one to two years, supported by the size and quality of its land bank.

Diversified Exposure to High Tier Cities: Guangzhou R&F has a well-diversified land bank of 40.3m sqm, of which 35% by achievable sales value is located in first-tier cities and 38% in second-tier cities. These include 23 cities that are either Tier 1 cities, provincial capitals, or major Tier 2 cities in different regions like Huizhou in the south, Wuxi in the east, and Baotou in the north. There is no over-concentration in any one city and even Guangzhou, where Guangzhou R&F first established its business, accounted for only 11% of sales value in the land bank at mid-2015. The diversification helps reduce uncertainties inherent in local policies and local economies.

Diversified Funding, Sufficient Liquidity: The company has demonstrated well-diversified access to both onshore and offshore capital markets, trust loans and perpetual securities as well as access to equity markets, which provide more financial flexibility. Around 85% of its total debt is onshore, comprising bank loans, other borrowings and perpetual capital instruments. The remaining 15% are offshore bonds. Guangzhou R&F recently issued onshore domestic bonds to replace CNY5.6bn of perpetual securities in order to lower its funding costs. In 1H15, the weighted average cost of financing was 8.15% compared with 8.22% in 2014 and 8.15% in 2013. At 30 June 2015, Guangzhou R&F had CNY23.9bn in cash (of which CNY5.9bn was restricted cash) and CNY17bn in unused uncommitted bank credit facilities.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
- Contracted sales remain flat in 2015;
- Contracted sales by gross floor area to increase by 2% over 2016-2018;
- Average selling price for contracted sales to be flat for 2016-2018;
- EBITDA margin at 28%-30% in 2015-2018
- Slower land bank acquisition in 2016-2018 with land premium around CNY7bn-10bn a year in 2015-2018
- Net debt including perpetuals to be around CNY60bn in 2015

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin below 25% on a sustained basis.
- Net debt/adjusted inventory over 50% on a sustained basis.
- Contracted sales/gross debt below 0.7x on a sustained basis.

Positive: The current rating is on Negative Outlook. Fitch does not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, if the above factors do not materialise, then the Outlook may revert to Stable.

FULL LIST OF RATING ACTIONS

Guangzhou R&F Properties Co., Ltd
- Long-Term Foreign-Currency IDR rating affirmed at 'BB', Outlook revised to Negative
- Long-Term Local-Currency IDR rating affirmed at 'BB', Outlook revised to Negative
- Senior unsecured rating affirmed at 'BB'

Big Will Investments Limited
- USD388m 10.875% senior unsecured notes due 2016 affirmed at 'BB'

Caifu Holdings Limited
- USD600m 8.75% senior unsecured notes due 2020 affirmed at 'BB'

Trillion Chance Limited
- USD1billion 8.5% senior unsecured notes due 2019 affirmed at 'BB'