OREANDA-NEWS. Fitch Ratings has assigned China-based homebuilder Golden Wheel Tiandi Holdings Company Limited's (GWTH, B/Stable) proposed US dollar senior unsecured notes an expected rating of 'B(EXP)' and Recovery Rating of 'RR4'.

The notes are rated at the same level as GWTH's senior unsecured rating of 'B' as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Niche Positioning: GWTH remains focused on developing small commercial and residential projects linked to metro stations. The company has four such projects in presale in 2H15. These kinds of projects usually fetch higher average selling prices because of their more convenient locations and the better foot traffic for the commercial property components. Potential competition from large national developers for metro-linked projects may squeeze GWTH's margin over the longer term, though volume-driven developers are less likely to participate in these small niche projects.

Rising Recurring Income: GWTH's recurring income is likely to gradually improve from 2015, with a new mall in Nanjing making its first full year of contribution, and as its new business of leasing out shops in metro stations matures from 2016. After the successful operation of a business leasing out shops in Nanjing's Xinjiekou metro station, GWTH recently became the master lessee of shops in another 13 metro stations in three other cities, with the master rental contract running for 10 to 15 years. Fitch considers GWTH's commitment for the rental under the master lease as fixed costs, and failure to turn a profit from this metro leasing business may negatively impact the ratings.

Limited Headroom for Land Acquisition: Fitch expects GWTH's leverage as measured by net debt/adjusted inventory to trend higher towards 40% from 23% at end-June 2015. This is because GWTH's development expenditure in 2015 is unlikely to be offset by sales, which are capped by the company's limited completed property inventory. The large development expenditure budget will restrict the company's ability to make further large land acquisitions. Fitch expects GWTH to maintain a land acquisition budget of 30%-35% of the company's annual contracted sales from 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- GWTH's annual sales by gross floor area (GFA) to stabilise between 160,000 square metres (sqm) and 200,000 sqm for 2015-2017
- Substantial sales to be achieved from the third year after land is acquired, and mostly from completed units
- Only investment properties that are completed or under development, and existing metro leasing businesses will contribute to recurring EBITDA

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/ adjusted inventory rising above 40% on a sustained basis (2014: 21%)
- Deviation from the current focus on metro-linked projects
- EBITDA margin falling below 25% on a sustained basis (2014: 23%)
- Metro leasing business suffering sustained losses

Positive: No positive rating action is expected over the next 12-18 months given the company's current small scale. However, positive rating action may result from:
- Investment properties' value exceeding CNY5bn (2014: CNY4.2bn) and annual development property sales sustained above CNY3bn (2014: CNY725m)
- Recurrent EBITDA interest coverage rising over 1.0x on a sustained basis (2014: 0.6x)