OREANDA-NEWS. Fitch Ratings has assigned China-based property developer Greenland Holding Group Company Limited's (Greenland; BB+/Negative) USD300m 3.5% senior notes due 2019 a 'BB+' final rating.

The notes will be issued by its wholly owned subsidiary Greenland Global Investment Limited under its USD3bn medium-term note programme. Proceeds from the note issue will be used for Greenland's overseas expansion.

The notes are guaranteed by Greenland in accordance with China's Foreign Exchange Administration Rules.

The notes are rated at the same level as Greenland's senior unsecured rating because they constitute direct, unsubordinated and senior unsecured obligations of the company. The final rating is in line with the expected rating assigned on 29 August 2016.

KEY RATING DRIVERS

Deteriorating Financial Metrics: Greenland's leverage rose to 74% at end-June 2016 from 66% at end-2015 and 62% at end-2014 due to subdued cash collection to support the fast expansion in its property development and other businesses. This level of leverage is comparable with Fitch-rated China homebuilders rated in the 'B' category. We believe Greenland's leverage may stay in the high-50% range even after receiving payment in 2017 for the bulk of its uncollected sale proceeds. This is because it had relied on supplier credit for its inventory build-up and this may reverse in 2017 upon project completion. Greenland's operating efficiency, as measured by total contracted sales/total debt, remained at 1.0x in last twelve months ended 1H16 after decreasing from 1.3x in 2014 due to higher debt.

Slow Sales Collection: Fitch estimates that Greenland's cash collection rate in 1H16 improved to 73% from 59% in 2015 thanks to management's efforts to increase residential sales contribution, but still lagged the industry average of high 80%. This is mainly because almost 40% of its contracted sales are from commercial properties, where cash collection is much slower than that of residential property sales and exposes Greenland to payment delays from small and medium enterprises, which have been hit harder by China's slower economic growth and the downturn in the commodity market.

Residential property developers typically collect the full sales amount within three months of sales, but commercial property developers collect a proportion of the sales in the first year - which can be low subject to negotiation, and have to wait until delivery - usually three to five years after sales - to collect the balance. Greenland's cash collection rate for residential properties improved from below 80% in 2015 to over 90% in 1H16, but that for commercial properties remained below 45% in 1H16.

Deleveraging Hinges on 2017 Collection: Greenland's high leverage is mitigated by the sizeable off-balance-sheet uncollected sales proceeds from both residential and commercial property sales, which exceeded its annual sales at end-2015. Sales from commercial properties surged in 2014 and 2015, and management expects cash collection to significantly improve in 2017 when these projects are delivered. Leverage is likely to trend down towards 60% if the expected collection materialises.

Non-Property Businesses Drive Leverage: Fitch believes Greenland's non-property businesses are still immature and need to be funded with cash flow from the company's property business. Greenland has made extensive investments in the financial institutions, consumer goods and infrastructure industries in 2015, which contributed to the increase in Greenland's leverage. In addition, Greenland's smaller equity placement in 2016 means it may need to fund a CNY10bn investment in the financial institutions business via internal cash or external debt, which will increase leverage further.

Benefits of Large Scale: Greenland is one of the biggest property developers in China by contracted sales. Greenland had contracted sales of CNY111bn in 1H16, up 34% from a year earlier. The company's property development business is well diversified over 40 cities in China and overseas. Greenland's management says it intends to sustain a property contracted sales of over CNY200bn in the next few years.

Diversified Funding Channels: Greenland has enhanced its onshore funding channels after gaining a listing on the Shanghai stock exchange in July 2015 by injecting assets into a listed company. Greenland plans to place out shares in this listed entity, although in August 2016 it further reduced the amount to be raised to CNY11bn from CNY15.7bn, after halving the size of the placement in May 2016. The completion of the placement remains uncertain, given the more stringent approval process in the onshore market.

Greenland in March 2016 also announced it is exploring injecting its hotel assets into a hospitality REIT that may be listed on the Singapore Exchange. In early 2016, Greenland completed a CNY10bn domestic bond issuance to augment its funding needs and reduce its borrowing costs. The company also established offshore funding channels through its 59%-owned subsidiary Greenland Hong Kong Holdings Limited.

Rating Uplift for Parental Support: Greenland has a moderately strong linkage with the Shanghai government. It will continue to be one of the major contributors to Shanghai's tax revenue and remain the largest Shanghai-based property company. Fitch believes the Shanghai State-owned Assets Supervision and Administration Commission, which owns 46% of Greenland, will continue to be the company's biggest shareholder and exert significant influence on Greenland's ability to acquire quality sites for development; even though its stake is likely to fall after the company's planned share placement in 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Greenland include:

- Contracted sales to remain flat in 2016-2018.

- Sales of commercial property to form 60% of total sales and residential sales will make up the remainder in 2016-2018

- Land premium of around CNY60bn-65bn in 2016-2018, or around 35% of current year contracted sales. Assume cash is paid out in the same year as incurred.

- CNY11bn to be raised via share placement in 2016.

RATING SENSITIVITIES

Positive: The Outlook for the standalone ratings may be revised to Stable if the negative guidelines are not met in the next 12 months.

Negative: Future developments that may, individually or collectively, lead to negative rating action on the ratings include:

- Net debt/adjusted inventory sustained above 60% (Fitch estimate for 1H16:74%)

- Property EBITDA margin sustained below 15% (Fitch estimate for 1H16: 19%)

- Contracted sales/total debt sustained below 1x (Fitch estimate for last 12 months to June 2016: 1.3x)

- Evidence of weakening support from parent

In arriving at debt ratios for the property segment, Fitch allocates a part of the company's debt to its non-property business to maintain the latter's net working capital/net debt ratio at 1.5x and the rest of the debt to the more profitable property business.