OREANDA-NEWS. Fitch Ratings has assigned China-based property developer Shimao Property Holdings Limited's (BB+/Stable) proposed US dollar denominated seven-year senior unsecured notes an expected rating of 'BB+(EXP)'.

The bonds are rated at the same level as Shimao's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final ratings are contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Contracted Sales Increased: Despite weak market conditions, Shimao's contracted sales rose 5% to CNY70bn in 2014, as expected by Fitch. Its 2014 contracted sales by gross floor area (GFA) rose 10% to 5.79 million sqm, but the average selling price fell 5% to CNY12,130 per sqm. Fitch believes the company's improved internal management through eight key regions and the implementation of an SAP IT system allow better day-to-day management of regional operations and sales.

Region-focused Player: Shimao has become a leading player in the Yangtze River Delta region while maintaining operations across China. Shimao continued to focus on key cities such as Hangzhou, Shanghai, Ningbo, the Fujian province and the Jiangsu province. These accounted for 70% of contracted sales in 1H14 and 2013 respectively, compared with 64% in 2012. Fitch believes Shimao can leverage on market leadership, brand reputation, local know-how and operational efficiency in these regions. In 1H14, around 50%-60% of its 36.9 million sqm land bank was in the above cities.

Shift of Product Mix: To improve contracted sales Shimao adjusted its residential property development mix to focus on first-time home buyers and upgraded the quality of housing stock. Shimao continues to focus on small- to medium-sized units of below 90 sqm to 140 sqm, which accounted for 75% to 80% of its units available for sale in 2012, 2013 and 1H14.

Stable EBITDA Margins: Shimao had EBITDA margins of 29% for 2012 and 2013 and 26.6% in 1H14. This is lower than its historical margins of above 30%, as Shimao shifted its product mix to first-time buyers and upgraders. However, its EBITDA margin is still higher than its 'BB'-rated peers' of 20% to 25%. Fitch expects Shimao to maintain its EBITDA margin at around the current level for the next two years, but it may decline as competition intensifies in the sector.

Delivery of Prudent Financial Strategy: During the challenging operating environment in 2011, Shimao demonstrated operational flexibility and prudent financial management. It slowed down land acquisitions to conserve cash, and it was able to depend on strong support from over 10 onshore and offshore banks, which continue to support the company. In 2013 and 2014, Shimao actively managed its offshore debt maturity profile by refinancing its debt ahead of maturity. This has resulted in interest costs falling to around 7.4% in 2013 from over 8% in 2012. Fitch expects this to trend to continue. Management's focus on maintaining both ample liquidity and ready access to various funding channels further supports its ratings.

Stable Operating Performance: Fitch expects Shimao to maintain a stable operating performance and prudent financial policies in the short to medium term. A large and well-located land bank of 36 million sqm across China and its proven track record in selective expansion in third-tier cities and tourism properties also support Shimao's rating.


KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by gross floor area to increase by 5% over 2015-2017;
- Average selling price for contracted sales to increase by 3% for 2015-2017;
- Fitch estimates the EBITDA margin at around 23-25% in 2015-2017

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-continued weakening of the operating environment, leading to EBITDA margin erosion below
20% (26.6% at end-June 2014 and 29.0% at end-2013)
-aggressive debt-funded expansion leading to net debt-to-inventory sustained above 40% (38.5% at end-June 2014 and 30.1% at end-2013)
-Contracted sales/gross debt below 1.25x (0.94x at end-June 2014 and 1.3x at end-2013) on a sustained basis
-Tightening liquidity due to a sustained fall in free cash flows, or weakened access to financing channels

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Longer track record of operating as a nationwide developer with leadership in multiple cities with a sound financial profile.