HONG KONG/SINGAPORE, October 10 (Fitch) Fitch Ratings has assigned China - based
homebuilder Franshion Properties (China) Limited's (Franshion, 'BBB-'/Stable)
USD300m 5.375% senior unsecured notes due 2018 a rating of 'BBB-'.
KEY RATING DRIVERS
Significant growth in development: Franshion's contracted sales from property
development rose to HKD11.2bn in H113 from HKD5.6bn in H112, reflecting a
significant ramp-up of its development business, particularly in Meixi Lake,
Changsha, capital of Hunan province. Franshion also increased its land bank to
6.9 million square metres (sq m) at end-2012 from 4.1 million sq m at end-2011.
Active property development has continued in H213, and Fitch believes Franshion
is likely to achieve its annual sales target.
Stable recurring income: Recurring income from the company's investment property
and hotels business has had more subdued growth - HKD1.7bn in H113 versus
HKD1.6bn in H112. Fitch does not expect faster growth in recurring income within
the next 12 months, until substantial new investment properties - including the
Nanjing International Center acquired in February 2013 - start to contribute to
this segment. This is because of slower growth in office rentals and the call
from the Chinese government for less overt public spending in 2013.
Stagnant coverage ratio: Net borrowing is not expected to increase substantially
over the next 12 months, but the recurring EBITDA-to-interest coverage ratio
will likely stay below 1.5x in the next 12 to 18 months until the scale of
investment properties and hotels in operation increases substantially.
Advantage in government links: Franshion's business continues to be supported by
its status as a state-owned property company. This provides the company with an
advantage in government-led strategic projects, and helps provide strong access
to domestic bank funding. This is illustrated by the favourable location of its
investment properties and commercial development projects.
Healthy financial position: Net debt/estimated adjusted inventory, excluding
market revaluation of investment property, is not expected to increase
substantially in the next 12 months from 42% at end-H113, given sales
performance, sufficient liquidity, and estimated capex for future development.
Its strong relationship with domestic banks and diversified funding sources also
keep Franshion's financial management flexible.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
-Significant decrease in contracted sales of project development in 2013
-Net debt/adjusted inventory excluding revaluation adjustment of investment
property remaining above 45% on a sustained basis (H113: 42% estimated by Fitch)
-Recurrent EBITDA/gross interest expense ratio falling below 1.0x on a sustained
basis (H113: 0.9x-1.0x, estimated by Fitch)
-Reduced ties with state-owned majority stakeholder Sinochem Group, including a
reduction in Sinochem Group's equity stake in Franshion to under 51% (62.87% of
shareholding at end-H113), or a shift from strategic projects due to weakened
relationships with local governments
-Reduced access to onshore bank loans or inter-company funding support
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
-Increasing the portfolio size of investment properties and hotels above CNY30bn
in value (2012: CNY16.6bn), while maintaining recurrent EBITDA/gross interest
expense above 2.5x
-Sales from project development and primary development of over CNY50bn per year
on a sustained basis, while keeping a strong financial position and recurrent
EBITDA/gross interest expense ratio at over 1x, which Fitch views as a remote
prospect for the next 18 months
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Lim Su Aik
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Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
Additional information is available at www.fitchratings.com.
Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are
available at www.fitchratings.com
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Rating Chinese Homebuilders
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