OREANDA-NEWS.  Fitch Ratings has assigned Wuzhou International Holdings Limited's (Wuzhou, B/Stable) USD100m 13.75% notes due 2018 a final rating of 'B' and Recovery Rating of 'RR4'.

Following the notes issuance, Wuzhou has upsized its 13.75% notes due 2018 (issued in September 2013 and January 2014) to USD300m from USD200m, with the same terms and conditions. The notes are rated at the same level as Wuzhou's senior unsecured rating of 'B' as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

Wuzhou intends to use the proceeds from the issuance to repay part of its existing borrowings and for other general corporate purposes.

KEY RATING DRIVERS
Diversifying Outside Jiangsu Province: Contracted sales from Jiangsu province fell to 32% of total sales in 2014 from 54% in 2013, following the launch of projects in other provinces such as Zhejiang, Henan, Yunnan and Hubei. This was supported by a 28% year-on-year rise in contracted sales to CNY6.6bn in 2014, topping Wuzhou's full-year target of CNY6.5bn. January-May contracted sales increased 14.6% to CNY1.96bn in 2015 as well. We expect the geographical diversification to continue as Wuzhou is committed to expanding into more major industrial and regional capital cities in other provinces.

Improved Debt Structure: Wuzhou has improved its capital structure after offshore bond issuances totalling USD300m in 2013-2015; and an offshore USD100m convertible bond issue in September and October 2014. The upcoming bond issuance will help Wuzhou further lengthen its debt maturity profile and reduce funding cost.

Leverage Rising: Leverage, as measured by net debt to adjusted inventory, rose to 36% at end-2014 due to a lower cash collection rate and continued construction capex during 2014. Fitch expects its leverage to further increase with its national expansion plan and initiative to expand in the logistics property market. Leverage will only exceed the 40% level at which Fitch would consider negative rating action if cash collection continues to be weaker than our expectation or Wuzhou acquires land aggressively.

Lower Margin to be Sustained: Wuzhou's gross profit margin (GPM) peaked at 53% in 2012 and fell to 34.8% in 2014. The GPM of 2H14 has dropped further to 26.2% due to more revenue contribution from lower-margin auxiliary properties. Wuzhou's EBITDA margin also slid to 13.6% in 2014 from 24.9% in 2013 due to high selling, general and administrative expenses related to expansion into new cities. We believe it was also caused by more project deliveries in third-tier cities and we expect the lower margin to be permanent.

Partners Raise Wuzhou's Profile: Fitch believes that Wuzhou's agreements to cooperate with Ping An Real Estate and Global Logistic Properties Limited (GLP; BBB+/Stable) separately in providing financial services to Wuzhou's SME clients and co-developing wholesale centres and logistics facilities may enhance the competitiveness of Wuzhou's projects. Wuzhou can tap GLP's expertise in logistics and storage facilities and raise capital from Ping An for project development. Since the cooperation agreements are still at the preliminary stage, the earnings and capex requirements will be minimal.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Average selling price of contracted sales to remain flat in 2015
- Contracted sales volume to reach CNY7bn target in 2015
- Land purchase cost equal to 10%-11% of contracted sales
- Construction cost equal to 50%-55% of contracted sales
- Gross margin to decline to 37% in 2015; EBITDA to remain above 20% in 2015

RATING SENSITIVITIES
Positive: Future developments that may collectively lead to positive rating actions include:
- Annual contracted sales being sustained above CNY8bn while maintaining current margins and credit metrics, and
- Increase in geographical diversification by establishing its presence in a greater number of provinces, and
-Satisfactory operating conditions for completed projects, in particular for those that have been open for more than three years

Negative: Factors that may, individually or collectively, lead to negative rating action include:
- A significant reduction in annual contracted sales
- Deviation from the current fast churn-out business model
- Net debt/adjusted inventory being sustained above 40%
- EBITDA margin staying below 20% on a sustained basis
- Contracted sales/ total debt staying below 1.0x on a sustained basis (2014: 1.2x).