OREANDA-NEWS. Fitch Ratings has assigned Chinese homebuilder Jingrui Holdings Limited's (Jingrui; B/Stable) USD150m 13.25% senior notes due 2018 a final rating of 'B' and Recovery Rating of 'RR4'.

The notes are rated at the same level as Jingrui's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 23 Apr 2015.

KEY RATING DRIVERS

Margin to Remain Under Pressure: Fitch expects Jingrui's EBITDA margin to remain under pressure in 2015. Jingrui's adjusted EBITDA margin was unchanged at 17% in 2014 from 2013. However, the average selling price (ASP) of contracted sales, a large part of which are pre-sales of uncompleted properties, dropped about 7% in 2014 to CNY9,210 per sqm, due to a bigger proportion of lower-priced projects as well as the market downturn in 2014. The pre-sales price drop due to the market downturn will likely affect the profit margin of properties to be delivered in 2015, but we expect the margin to recover from 2016 as the sector sentiment improves.

High Leverage to Persist: Jingrui's leverage, measured by net debt over adjusted inventory, dropped slightly to 43% at end-2014 from 45% at end-2013, mainly because the company halted land purchases from the second quarter of 2014. However, the company restarted its land acquisitions in 2015 and estimated its land premium in 2015 to be CNY4.5bn, which is about 45% of its full-year contracted sales target. While Jingrui plans for its project level equity partner to shoulder around CNY1.0bn of the land premium, Fitch believes its expansion will drive leverage higher but expects it to remain below 60% in the next 12 months.

Refocus on Higher-tier Cities: Jingrui plans to focus its business on first- and second-tier cities within its current markets, and sell down inventory in third-tier cities. The more resilient demand in higher-tier cities could improve the ASP of contracted sales and the profit margin. However, we expect the margin improvements to be mild given the fierce competition in its target cities such as Shanghai, Hangzhou and Chongqing.

Tight but Sustainable Liquidity: Jingrui's liquidity position is tight as its short-term debt increased 64% to CNY5.1bn at end-2014. It completed a HKD128m (CNY102m) rights issue in the fourth quarter of 2014, which improved the company's cash position. Fitch believes Jingrui's total cash of CNY4.4bn and undrawn credit facilities of CNY5.1bn at end-2014 are sufficient to cover its short-term debt maturing in 2015.


KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Land premium of CNY4.5bn in 2015 with higher per sqm land costs due to the higher-tier city focus
- Contracted sales are estimated based on properties available for sale in 2015, and the sell-through ratio
- The company's ASP of contracted sales to recover from 2014 levels and rise slightly in 2015 for comparable projects
- Jingrui to maintain its fast-churn and high cash-flow turnover business model

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/ adjusted inventory sustained above 60% (end 2014: 43%)
- EBITDA margin sustained below 15% (2014: 17%)
- Contracted sales/total debt sustained below 1.0x (2014: 0.9x)

Positive: Future developments that may collectively lead to positive rating actions include:
- Net debt/adjusted inventory sustained below 40%
- EBITDA margin sustained above 18%
- Maintaining its fast churn-out model, and contracted sales/total debt is sustained at over 1.3x.