OREANDA-NEWS. Fitch Ratings has affirmed China-based homebuilder Golden Wheel Tiandi Holdings Company Limited's (GWTH) Long-Term Foreign and Local Currency Issuer Default Ratings at 'B' with a Stable Outlook. Fitch has also affirmed GWTH's senior unsecured rating at 'B', with Recovery Rating at 'RR4'. A full list of rating actions is at the end of this commentary.

The rating affirmation is premised on GWTH's good quality metro-linked property development portfolio, moderate leverage compared with its 'B'-rated peers and still healthy margins. Its small scale and rising leverage due to increasing development property exposure continue to constrain its ratings.

KEY RATING DRIVERS
Niche Positioning: GWTH remained focused on developing small commercial and residential projects linked to metro stations. The company has six such projects under development and launched presales for four projects from June 2015. These kinds of projects usually fetch higher average selling prices because of their more convenient locations and better foot traffic for the commercial property components. Potential competition from large national developers for metro-linked projects may squeeze GWTH's margin over the longer term, though volume-driven developers are less likely to participate in these small niche projects.

Negative Margins Temporary: Over the medium term, we expect GWTH's EBITDA margins to stay around 25%, supported by its existing metro-linked integrated projects, particularly in Nanjing. Furthermore, the company's plan to sell completed projects in metro lines that are already operating supports higher selling prices and better margin. The company's EBITDA turned negative in 2015, mainly due to a sharp decline in revenue as it delivered only a limited stock of properties in the year. EBITDA was also squeezed by higher expenses driven by rising sales activities in 2015. GWTH's future projects may face margin pressure because well-located metro-linked sites are usually more expensive.

Limited Headroom for Land Acquisition: Fitch expects GWTH's leverage as measured by net debt/adjusted inventory to trend towards 40% (end-2015: 23.8%) with land replenishment rate at 1x-1.2x during next two to three years. The company plans to spend around 40%-50% of total contracted sales for next two years on development to increase its saleable resources, which will restrict the company's ability to make large land acquisitions. Fitch expects GWTH to maintain a land acquisition budget of 35%-40% of the company's yearly contracted sales from 2016.

Rising Recurring Income: Fitch expects the investment property and metro leasing divisions to expand steadily over the medium term, with new investment property assets opening from 2017 and the business of leasing out shops in metro stations starting to contribute profits from 2018. These divisions will offer the company recurring income for interest servicing, which will mitigate the cash flow volatility in the development property business. Fitch expects the company's recurring EBITDA/ gross interest to increase to around 0.7x from 0.55x in 2015.

Expansion in Metro Leasing: The metro leasing division's gross profit margin was -19% in 2015 (2014: 27%; 2013: 44%), mainly due to the opening of three new metro malls. The company is expanding its metro leasing business and plans to open four to five metro malls a year for the next two to three years. We expect the segment to continue posting net losses over 2016-2017, considering the average breakeven period for a new mall is around one year. The metro leasing business is likely to be profitable from 2018 as more malls mature. GWTH has committed to the costs in renting the premises for the business, and failure to turn in profit for this segment could negatively impact GWTH's ratings.

Planning Metro Business Spin-off: Fitch expects the spin-off of GWTH's metro leasing business to have limited impact on GWTH's ratings given its small scale relative to its core property businesses. A spin-off could improve liquidity slightly, though, and provide greater transparency of its metro leasing business if it is listed. GWTH's 100%-owned metro leasing business subsidiary, Nanjing Golden Wheel Commercial Management (NJGW), applied for a listing on the National Equities Exchange and Quotations System on 28 April 2016. NJGW is the sole platform for the metro leasing business and is the master lessee for all 14 of the group's metro malls.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- GWTH's annual contracted sales value (excluding JVs) to remain above CNY1bn with average selling price above CNY11,000/sqm over 2016-2018
- Substantial sales to be achieved from the third year after land is acquired, and mostly from completed units
- Only investment properties that are completed or under development, and existing metro leasing businesses will contribute to recurring EBITDA
- Land replenishment rate at 1.0x-1.2x over 2016-2018

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/ adjusted inventory rising above 40% on a sustained basis (end-2015: 23.8%)
- Deviation from the current focus on metro-linked projects
- EBITDA margin falling below 25% on a sustained basis (2015: -5.4%; 2014: 29.2%)
- Metro leasing business suffering sustained losses

Positive: No positive rating action is expected over the next 12-18 months given the company's current small scale. However, over the long term, positive rating action may result from:
- Investment properties' value exceeding CNY5bn (2015: CNY4.6bn) and annual development property sales sustained above CNY3bn (2015: CNY923m)
- Recurring EBITDA interest coverage rising over 1.0x on a sustained basis (2015: 0.55x)

FULL LIST OF RATING ACTIONS
- Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable
- Senior unsecured rating affirmed at 'B' and Recovery Rating at 'RR4'
- USD100m 9.5% senior unsecured notes due 2017 affirmed at 'B' and Recovery Rating at 'RR4'