Fitch Ratings has assigned
The proposed notes are rated at the same level as Zhenro's senior unsecured rating because they will constitute its direct and senior unsecured obligations. Zhenro intends to use the net proceeds from the issue mainly to refinance existing debt, in accordance with Zhenro's green bond framework.
Well-controlled land acquisitions and internally generated cash flow have reduced Zhenro's leverage - defined by net debt/adjusted inventory, including proportional consolidation of joint ventures (JVs) and associates - to 41.6% by end-1H20, from 55% in 1H19. However, its small land bank creates some pressure to replenish land and may pose a challenge in keeping leverage at the current level. Fitch forecasts Zhenro can sustain leverage at below 50% in the forecast period, 2020-2024.
Zhenro's ratings are supported by its attributable contracted sales scale, quality land bank, healthy contracted sales growth and low leverage in 2019 and 1H20. The rating is also constrained by its evolving group structure and deteriorated margins.
KEY RATING DRIVERS
Leverage Decline: Zhenro's proportional consolidated leverage declined to 41%-42% in 2H19 and 1H20, from 55% in 1H19, on the back of strong sales and controlled land acquisitions. However, Fitch believes that leverage may edge up from the current level if the company lengthens its land bank life to be in line with 'BB-' peers. Acquiring land at market prices could limit its ability to keep land costs low, especially as it buys more land parcels in Tier 2 cities where there is more intense competition among developers.
Larger Sales Scale than Peers: Zhenro's
Evolving Group Structure: Zhenro's implied cash collection (defined as change in customer deposits plus revenue booked during the year) in 2019 was only
The high proportion of off-balance-sheet projects has meant the performance of many projects has not been fully reflected in the company's financials, in Fitch's view. However, Fitch believes Zhenro's financials will gradually reflect the overall performance of projects because recently acquired land is included in the consolidated balance sheet. This transition may lead to short-term volatility in the company's financial metrics, before stabilising.
Margin Edges Lower: Zhenro's EBITDA margin dropped in 2019 and 1H20 yoy, caused mainly by disposal of low-margin projects and lower capitalised interest. Fitch expects the EBITDA margin to stay at 22% in 2020 and edge up slightly in 2021. Zhenro acquired new land at an average cost of
High Non-Controlling Interest (NCI): Fitch expects NCI as a percentage of Zhenro's equity to stay at 40%-45% in 2020-2024, which is higher than the average of 'B+' peers. This reflects Zhenro's reliance on cash from contracted sales and capital contributions from non-controlling shareholders, which are mainly developers, as a source of financing to expand scale. This lowers Zhenro's need for debt funding, but creates potential cash leakage and reduces further financial flexibility because homebuilders with lower NCI can dispose of stakes in projects to reduce leverage.
DERIVATION SUMMARY
Zhenro's proportionally consolidated leverage in 2019 and 1H20 was comparable with that of the 'BB-' peers. Zhenro has a quality land bank, which is shown in its ASP of
Zhenro's unsold attributable land bank at end-1H20 was equivalent to around two to 2.5 years of GFA sold, which is shorter than that of most 'BB-' peers, such as
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Attributable contracted sales of
0%-4% rise in ASP each year in 2020-2024 (2019:
Annual land premium to be maintained at around 2.5 years of land bank life;
0%-2% rise each year in average land costs in 2020-2024 (2019:
GFA acquired is 0.9x-1.0x of GFA sold in 2020-2024;
Selling, general and administrative expenses at 3.3%-3.5% of contracted sales in 2020-2024.
Key Recovery Rating Assumptions:
Zhenro to be liquidated in a bankruptcy, as it is an asset-trading company;
10% administration claims;
60% advance rate applied to excess cash (available cash
100% advance rate to restricted cash;
70% advance rate to adjusted net inventory of Zhenro to reflect its 20%-25% EBITDA margin;
70% advance rate to accounts receivable;
60% advance rate to net property, plant and equipment;
40% advance rate to financial instrument;
20% advance rate to investment properties.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A longer record of leverage (net debt/adjusted inventory) being sustained below 45% with land bank life in line with high-churn peers;
EBITDA margin, after adding back capitalised interest in cost of goods sold, above 20% for a sustained period.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage (net debt/adjusted inventory) above 55% for a sustained period;
EBITDA margin, after adding back capitalised interest in cost of goods sold, below 15% for a sustained period.
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 '
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: Zhenro had unrestricted cash of
ESG CONSIDERATIONS
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 to 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.
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