HONG KONG, 28 January 2021. Pengyuan International has affirmed Shimao Group 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 operation profile, which is buoyed by its enlarging scale, leading market position and geographical diversification. In addition, thanks to its high-quality land bank, the Company was able to maintain a solid profitability and control leverage. On the other hand, Shimao’s rating is constrained by its concentrated exposure to China’s property market and relatively high exposure to foreign currencies.
The stable outlook for Shimao reflects Pengyuan International’s expectation that the Company will continue to strengthen its market position and grow its land bank while maintaining a healthy financial profile.
Market position maintained. In 2020, Shimao remained as one of the top 10 property developers in China, measured by total contracted sales, according to CRIC Research and Leju, which are two Chinese property research companies. Based on our analysis, Shimao’s market share increased to 1.73% and 0.97% in terms of contracted sales value and contracted sales gross floor area (GFA) respectively, from 1.63% and 0.85% in 2019.
Strong contracted sales growth with improved cash collection. Undeterred by the adverse impact from the pandemic at the beginning of 2020, Shimao achieved total contracted sales of RMB300 billion in 2020, a year-on-year increase of 16%, after a 48% growth in 2019. The growth in contracted sales was mainly driven by the 17% increase in sales volume. We expect the Company’s contracted sales to grow 20% year-on-year to RMB360 billion in 2021. In addition to a strong growth in contracted sales, Shimao’s cash collection rate rose to 80.6% in the first half of 2020 from 75% in 2019. We expect its cash collection rate to remain at a healthy level of 80% in both 2021 and 2022.
Land bank expansion with improved geographical diversity. In the first half of 2020, Shimao has improved its geographical diversification by expanding its land bank to 135 cities from 101 cities in 2019, with 423 projects covering an area of 84 million square metres (sqm). Of the total, 65% of the newly acquired land is located in the first and second tier cities. We estimate the average attributable land cost was RMB5,279/sqm, representing 30% of its average selling price (ASP) at the end of the first half of 2020. Going forward, we expect the first and second tier cities’ contribution to the contracted sales to increase. Shimao’s saleable value from core cities provide a solid foundation for a sustainable growth in the future.
Solid profitability maintained. Thanks to its low-cost land bank and growing operating scale, Shimao has been able to maintain its EBITDA margin of 26% in 2019. In our view, Shimao will maintain its EBITDA margin at its current level in both 2021 and 2022, while profit contribution from non-property development businesses will gradually increase in the same period. Shimao’s rental income is expected to grow with its commercial property projects scheduled to be launched in the pipeline. Shimao has more than 2 million sqm commercial projects to put into operation in the run up to 2025, with 45% located in the Greater Bay Area.
Concentration risk. Shimao has a highly concentrated exposure to China’s property market. In the first half of 2020, property development, hotels, investment property and property management contributed 95%, 1%, 1% and 3% to its revenue respectively. The Company’s financial performance is heavily influenced by the cyclicality of China’s economy and property market.
Concerns related to acquisitions. Shimao has been active in mergers and acquisitions (M&A) in recent years. In our view, these M&As incur risks and challenges in terms of project quality and profitability, and potentially higher debt.
Currency exposure. Shimao has a relatively high foreign currency exposure. As of 2019, 55% of its debt was denominated in non-Chinese currencies, of which 36% was in the US dollar and the remaining19% was in the Hong Kong dollar. However, its property development projects and hotel assets in Hong Kong covered 90% of its foreign debt as of 2019, 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) an increase of above 45% on a sustained basis in leverage measured by debt to adjusted inventory; 2) a decline of EBITDA margin to below 20% on a sustained basis with little prospects of recovery; and 3) a significantly weakened operating profile.
We would consider upgrading the Company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) an improvement of financial profile on a sustained basis; and 2) a strengthened operating profile.
Note: Ratings mentioned in this press release are unsolicited.
RATING SERVICES ENQUIRIES
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Ke Chen, PhD
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Date of Relevant Rating Committee: 25 January 2021
Additional information is available on www.pyrating.com
Unsolicited ratings – non-participative rating – not disclosed
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