OREANDA-NEWS. Fitch Ratings has affirmed China-based Homebuilder Sunshine 100 China Holdings Ltd.'s (Sunshine 100) Long-Term Foreign-Currency Issuer Default Ratings (IDR) at 'B-'. The Outlook is revised to Negative from Positive. Sunshine 100's senior unsecured rating and the rating on its outstanding USD215m senior notes due in 2017 have been downgraded to 'CCC+' from 'B-', with a Recovery Rating of 'RR5'.

The Outlook revision reflects significant headwinds for the homebuilder as slower growth in housing sales resulted in insufficient cash flow to support the expansion of its commercial property business. Contracted sales turnover, measured by contracted sales to gross debt, slowed to 0.4x, and leverage, measured by net debt to adjusted inventory, surged to 62%.

The IDR was affirmed at 'B-' because the company does not have an imminent liquidity shortage, and it may yet gradually improve its business model by cutting back land purchases and disposing of lower-quality projects.

The one-notch downgrade of the senior unsecured rating reflects Fitch's expectations of lower recovery in the event of a default, which may be seen in the shift in the Recovery Rating to 'RR5', which represents below average recovery prospects, from 'RR4', which represents average recovery prospects.

KEY RATING DRIVERS

Contracted Sales Miss Target: Sunshine 100's contracted sales rose 12.4% to CNY7.5bn in 2015, which was below the management's target. Most of the company's projects acquired before 2015 are in areas with excessive property inventories or in lower-tier cities, which have slower turnover and less predictable sales. Sunshine 100 needs to generate contracted sales to support its large development expenditure which includes the expansion of its investment properties. The slower-than-expected contracted sales turnover has put pressure on its financial flexibility.

Asset Quality Improving Gradually: Sunshine 100 is refocusing its resources on better located projects in 2015 to improve its sales performance. The company acquired four land parcels with gross floor area (GFA) of 1.5 million square metres (sqm) in 2015 for attributable land premium of CNY1.1bn. The four sites are of better quality and well-located. Sunshine 100 could gradually improve its asset quality to support contracted sales growth if it continues this disciplined land purchase strategy. The company's total attributable land reserve was 10.5million sqm of GFA at end-2015.

Persistent High Development Expenditure: Sunshine 100's high development expenditure has increased its cash needs and hurt its financial profile. The company has had high construction budgets since 2014, and the budget is CNY6bn in 2016, representing 60% of total planned contracted sales. This is driven by its large construction scale; the company had total GFA under construction of 3.4 million sqm at end-2015, among which 1.9 million sqm were started in 2015.

Leverage to Remain High: Sunshine 100's net debt increased 55% yoy at end-2015, which drove leverage to 62% from 51% at end-2014. However, if its efforts in raising contracted sales, project destocking and improving asset quality go as the management expects, its leverage could be maintained at 60%-65% in the next 12-18 months.

Sustainable Liquidity: Sunshine 100's short-term debt payable in 2016 is less than 25% of total debt, which reached CNY20bn at the end of 1Q16. Fitch believes Sunshine 100's liquidity is sustainable in the next 12-months because it has an undrawn bank facility of CNY5.7bn and domestic bond issuance quota of CNY3.7bn approved by China Securities Regulatory Commission (CSRC).

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Mild growth in contracted sales in 2016
- Active inventory destocking and sales of lower-quality assets to improve asset quality and ease liquidity
- Selective and disciplined land purchases to improve land bank quality and support contract sales growth
- Development expenditure remains high at around CNY6bn in 2016
- Profit margins remain under pressure

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/adjusted inventory sustained above 65% (2015: 62%)
- Contracted sales/total debt sustained below 0.4x (2015: 0.4x)
- EBITDA margin sustained below 10% (2015: 11%)
- Deterioration in Sunshine 100's liquidity position, such as failure to refinance its existing USD215m offshore bond maturing in 2017 in the next 12-18 months

Positive: The current rating is on Negative Outlook. Fitch does not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, if the above factors do not materialise, then the Outlook may revert to Stable.

FULL LIST OF RATING ACTIONS

- Long-Term Foreign-Currency IDR affirmed at 'B-', Outlook revised to Negative from Positive
- Senior unsecured rating downgraded to 'CCC+' from 'B-', with a Recovery Rating of 'RR5'
- USD215m 12.75% senior unsecured notes due 2017 downgraded to 'CCC+' from 'B-', with a Recovery Rating of 'RR5'