HONG KONG, September 23 (Fitch) Fitch Ratings has assigned China - based
commercial property developer Wuzhou International Holdings Limited's (Wuzhou,
B/Stable) USD100m 13.75% notes due 2018 a final rating of 'B'. The assignment of
the final rating follows the receipt of documents conforming to information
already received and the final rating is in line with the expected rating
assigned on 16 September 2013.
The notes are rated at the same level as Wuzhou's senior unsecured rating as
they represent direct, unconditional, unsecured and unsubordinated obligations
of the company.
KEY RATING DRIVERS
Small-scale property developer: Wuzhou's rating is constrained by its small
scale compared with Fitch-rated peers. With historical contracted sales of
CNY1.2bn, CNY2.1bn and CNY2.8bn in 2010-2012, Wuzhou is still a small property
developer in China. It faces concentration risk with 55% of its contracted sales
in H113 derived from Jiangsu province and seven out of 11 of its completed
projects in Wuxi. It remains to be seen whether Wuzhou can successfully transfer
its business model from Wuxi into other cities in China. As the number of
projects under management increases across different provinces, it will be
challenging for the company to maintain a high-quality tenant mix in each
Volatile commercial property sales: As a commercial property developer in China,
Wuzhou is exposed to higher risk than residential property developers.
Commercial property sales mainly target investment demand, which can be
adversely affected during economic downturns or in an environment of tighter
liquidity. Investment demand is also highly dependent on brand reputation, which
is susceptible to operating performance of existing projects. In general, cash
flow projection from property sales is less predictable for commercial property
developers, compared with residential property developers.
Strong commercial sites limited: With a longer list of requirements, including
high foot traffic, easy accessibility and high residents' income levels,
commercial property sites with strong development potential are harder to come
by than residential sites. Wuzhou's upcoming projects are mostly situated in
third-tier cities. While the company enjoyed low land cost (typically a few
hundred CNY/sqm), it faces the risk of whether there will be enough consumption
demand in third-tier cities to support retail outlets in the projects.
Operational success in Wuxi: Wuzhou has completed two wholesale markets and five
mixed-use commercial complexes in Wuxi, establishing a critical mass in its
hometown. Wuzhou has been successful in selling the majority (80%-90%) of its
project space on a strata-title basis and keeping the remainder for lease
income. The company actively manages the tenant mix for shop buyers after the
projects open and its properties enjoy an average occupancy rate of above 90%.
Capitalising on its success and experience in Wuxi, Wuzhou is now expanding in
the eastern, central, south-western and north-eastern part of China. With a
quick churn-out business model, Wuzhou targets to grow its contracted sales to
CNY5bn in 2013 from CNY2.8bn in 2012. Wuzhou recorded contracted sales of
CNY2.8bn in the year to August 2013, up 76% yoy.
After-sale tenant-mix management: Wuzhou differentiates itself from other
commercial property developers by providing after-sale tenant-mix management and
negotiating leases with prospective tenants on behalf of shop owners. In return,
Wuzhou charges shop owners a commercial management service fee. The fee is equal
to 100% of the rental value in the first three years of the lease and then
8%-10% of the rental value in the fourth year onwards. If Wuzhou can continue
maintaining an optimal tenant mix and high occupancy rates in its existing
projects, it could enhance its brand reputation and attract more buyers to its
Strong network of buyers: Wuzhou's founder, Mr. Shu Cecheng, was in the trading
and manufacturing business before turning to property development in 2004. Mr.
Shu has an extensive business network, which offers Wuzhou a pool of potential
tenants and shop buyers, especially in wholesale markets. This is crucial to
Wuzhou as it relies heavily on project sales, which generate cash and enable the
company to replenish its land bank quickly.
Sufficient liquidity: Fitch expects Wuzhou to have sufficient liquidity to cover
its short-term debts. As at mid-2013, Wuzhou had CNY1.8bn of cash (of which
CNY377m was restricted cash and pledged deposits) and CNY1.6bn in undrawn credit
facilities. That is more than enough to cover its CNY835m debt to be repaid in
the coming 12 months. However, Wuzhou's financial flexibility is limited because
all of its debt is secured debt. The company plans to diversify its funding
sources and reduce its reliance on secured debt. Also, the company plans to
reduce the proportion of trust loans in its portfolio to less than 25% in the
next one-two years from 33% as of end-H113 to reduce its overall borrowing
Positive: Future developments that may collectively lead to positive rating
-Annual contracted sales sustained above CNY8bn while maintaining current
margins and credit metrics, and
-Increase in geographical diversification by establishing its presence in a
greater number of provinces, and
-Satisfactory operating conditions for completed projects, in particular for
those that have been open for more than three years
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
-A significant reduction in annual contracted sales
-Deviation from the current fast churn-out business model
-Net debt/adjusted inventory being sustained above 40% (2012: 31%)
-EBITDA margin staying below 20% on a sustained basis (2012: 32%)
-Contracted sales/ total debt staying below 1.0x on a sustained basis (2012:
Headquartered in Wuxi in Jiangsu province, Wuzhou is a commercial property
developer focusing on specialised wholesale market and multi-functional
commercial complexes in the second- and third-tier cities in China.
+852 2263 9969
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Additional information is available at www.fitchratings.com.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2013, are
available at www.fitchratings.com.
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