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.
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.
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.
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.
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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)
Unsolicited ratings – non-participative rating – not disclosed
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