Pengyuan International Affirms ‘BBB-’ Rating of Shimao Property Holdings Limited; Outlook Stable


24 Jan 2020

    HONG KONG, 22 January 2020. Pengyuan International has affirmed Shimao Property Holdings Limited’s (Shimao’s) global scale long-term issuer credit rating (LTICR) of ‘BBB-’. The outlook is stable.

    The rating reflects Shimao’s improving market position supported by its strong sales execution. In addition, thanks to its diversified high quality land bank, the company was able to maintain high profitability and control leverage, while expanding sales. On the other hand, Shimao’s rating is constrained by its concentrated exposure to China’s property market and high exposure to foreign currencies.

    The stable outlook for Shimao reflects Pengyuan International’s expectation that the company will keep growing its contracted sales and land bank while maintaining a healthy financial profile.

    RATING RATIONALE

    Credit Strengths

    Strengthened market position In 2019, Shimao improved its ranking among China property developers to 9 from 11 in 2018, as measured by attributable contracted sales, according to CRIC Research and Leju, two Chinese property research companies. In addition, the company has diversified its land bank by expanding its property project coverage to 101 cities in mainland China by the middle of 2019 from 87 cities at the end of 2018. In 2019, Shimao had a total land bank of 64 million square metres (sqm), with an estimated land reserve life of six years. We believe the company's abundant high quality land bank will support its expansion with flexibility in land replenishment.

    Strong contracted sales growth with better cash collection Shimao achieved total contracted sales of RMB260 billion in 2019, a year-on-year increase of 57% following its 75% growth in 2018. The growth in contracted sales was supported by a 37% increase in sales volume and 8% increase in average selling price (ASP). In 2020, Shimao’s contracted sales can grow 26% year-on-year to RMB328 billion, in our view, due to its ample saleable resources. In addition to a strong contracted sale, Shimao has improved its cash collection rate to 81% in the first half of 2019 from 78% in 2018. We expect its cash collection rate to remain at a healthy 80% in 2019 and 2020.

    Profitability maintained Despite the industry’s volatility, Shimao had an EBITDA margin of 25% in the first half of 2019, slightly lower than its EBITDA margin of 26% in 2018. We expect the company to report EBITDA margin of 25% and 26% in 2019 and 2020, thanks to its low land costs and expanding operating scale. In 2018 and 2019, Shimao took advantage of China’s weak land market to replenish its land bank. We estimate Shimao’s attributable land bank unit cost at around RMB6,000 per sqm, much lower than its ASP of RMB15,713 per sqm.

    Potential spin-off to improve financial position Shimao’s management plans to spin off the firm’s hotel and property management units in 2021. The company owns high quality investment properties in Tier-1 and 2 cities in China. We believe the potential spin-off will realize the value of its investment properties and lower the company’s leverage. As of June 2019, Shimao had 22 hotels under management, with a net asset value of RMB124 billion.

    Credit Weaknesses

    Concentration risk Shimao has a highly concentrated exposure to China’s property market. In the first half of 2019, property development, hotels, investment property and property management contributed 94%, 2%, 1% and 3% of its revenue respectively. The company’s financial performance is heavily influenced by the cyclicality of China’s economy and property market.

    Acquisitions raise concerns Shimao has been active in merger and acquisitions (M&A) in recent years. We estimate M&A accounts for around 50% of the gross floor area (GFA) of its new land bank acquired from 2017 to 2019. Expansion of land bank incurs risks and challenges in terms of project quality and profitability, sustainability of the land banking strategy and potentially higher debt.

    Currency exposure Shimao has relatively high foreign currency exposure. As of June 2019, 58% of its debt is denominated in non-Chinese currencies, of which 42% is in US dollars and 16% in Hong Kong dollars. However, its property development projects and hotel assets in Hong Kong could cover 90% of its foreign debt by 2020, according to our estimates, which would serve as a natural hedge to its foreign exchange debt exposure.

    RATING OUTLOOK

    The stable outlook reflects our expectation that Shimao will continue to generate strong growth in contracted sales while maintaining a healthy financial profile.

    We would consider downgrading Shimao’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by 1) Leverage measured by debt to adjusted inventory increases above 45% on a sustained basis, 2) EBITDA margin falls below 20% on a sustained basis with little prospects of recovery, 3)  Substantial deterioration of its operating profile.

    We would consider upgrading the company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) Improvement of financial profile on a sustained basis,  2) Strengthening of operating profile.

    Note: ratings mentioned in this press release are unsolicited ratings.

    ANALYSTS CONTACT

    Primary Analyst

    Winnie Guo

    +852 3615 8344

    winnie.guo@pyrating.com

    Secondary Analyst

    Simon Lee

    +852 3615 8307

    simon.lee@pyrating.com

    Committee Chair

    Tony Tang

    +852 3615 8278

    tony.tang@pyrating.com

    MEDIA CONTACT
    media@pyrating.com
    OTHER ENQUIRIES
    contact@pyrating.com
    Date of Relevant Rating Committee: 17 January 2020

    Additional information is available on www.pyrating.com

    Related Criteria

    Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

    General Corporate Rating Criteria (15 March 2018)

    Industry Credit Guidelines Chinese Homebuilders and Property Developers (31 August 2018)

    ******************************************************************
    DISCLAIMER

    Unsolicited ratings – non-participative rating – not disclosed

    Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.pyrating.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.

    All credit ratings and reports are subject to disclaimers and certain limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.

    CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.

    For the purpose of rating process the Company obtains sufficient quality factual information from sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process.

    Users of the Company’s credit ratings should refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.

    NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

    The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.

    The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has not been disclosed to the rated entity or to its related party and, following such disclosure, the credit rating has not been amended before being issued.

    The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

    The Company’s credit ratings and reports are not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor to ensure compliance with applicable laws and regulations.

    Copyright © 2020 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.