OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of China-based Wuzhou International Holdings Limited (Wuzhou) to 'B-' from 'B'. The Outlook is Stable. The property developer's senior unsecured rating and the rating on its outstanding USD300m senior notes have also been downgraded to 'B-' with Recovery Rating of 'RR4'.

The downgrade reflects Fitch's belief that Wuzhou's EBITDA margin will stay below 20% over the next two years as it destocks aggressively, and there will not be material reduction in debt level. Wuzhou's EBITDA margin fell to 14.1% in 1H15 and 13.6% in 2014 from 24.8% in 2013. Wuzhou's land bank fell to 7.4m square metres (sqm) from 8m sqm in the six months to end-June 2015. Its leverage as measured by net debt/adjusted inventory ratio has risen to 33% from 29% over the same period. Wuzhou's EBITDA from its investment properties management and other segments also fell sharply to CNY7.6m in 1H15 from CNY52.9m in 2H14 and CNY29.6m in 1H14.

KEY RATING DRIVERS
Narrow Margin to Persist: Fitch expects Wuzhou's low EBITDA margin in 1H15 to continue at around the current level over the next two years. Wuzhou's declining gross profit margin trend has lasted for more than two years; from its peak at 53% in 2012, it then fell to 43% in 2013, 35% in 2014 and 31% in 1H15. The margin decline was mainly caused by liquidation of its inventory in mature projects at lower price and rising land costs. Wuzhou's EBITDA margin was also affected by high sales, general and administrative (SG&A) expenses related to expansion into new cities. The SG&A expenses may fall marginally from 2H15 following staff layoffs in 2015.

Geographical Diversification Benefits Unclear: Wuzhou's average selling price (ASP) has declined steadily to CNY5,993per sqm in 1H15 from a peak of CNY8,742 per sqm in 2011. The company's diversification away from Jiangsu Province has not helped profit margin, although sales growth had been sustained. Wuzhou currently operates in eleven provinces and municipalities. Jiangsu Province accounted for 47% of total contracted sales in 1H15, down from 54% in 2013. Wuzhou's contracted sales rose 9% yoy for the first seven months of 2015 to reach 51% of its full-year target of CNY7bn.

Mild Leverage Supports Ratings: Fitch expects Wuzhou's leverage to be sustained around 30% as an increase in investment properties will offset the reduction in development properties to keep the adjusted inventory stable. Investment properties accounted for over 50% of adjusted inventory at end-June 2015. Wuzhou has reined in its leverage by continuing its fast-churn business and slowing down land replenishment from 2014. Wuzhou aims to deliver more value-added services to existing tenants and potential buyers instead on continuing its scale expansion. Wuzhou's investment-property yield was 4%-5% in 2014.

Partners Raise Wuzhou's Profile: Fitch believes that Wuzhou's agreements to cooperate with Ping An Real Estate Co. Ltd. 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 on 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.

Liquidity Remains Adequate: Wuzhou has improved its capital structure by issuing additional bonds that bring its total outstanding offshore bonds to USD300m (CNY1.9bn). Fitch expects the company to raise more funds from the onshore bond market. At end-2014, 33% of Wuzhou's debt was unsecured, compared with 26% at mid-2014. Wuzhou retains flexibility in liquidity management as it has unencumbered investment properties and development properties of CNY8.4bn at end-2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Land acquisition gross floor area (GFA) at 1.2x-1.5x of sales GFA in 2015-2018
- Gross profit margin of 31%-32% in 2015-2018
- Same cash collection rate in 2015-2018 as that in 2014
- Mild contracted sales growth of 3.5%-8.2% per annum in 2015-2018
- Marginal improvement in SG&A expenses

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- deterioration in refinancing prospects that has significant adverse impact on its liquidity profile

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Net debt/adjusted leverage sustained below 35%
- EBITDA margin sustained above 20%.