US dollar senior unsecured notes a rating of 'B'
Shanghai China - Fitch Ratings has assigned China-based homebuilder Radiance Group Co., Ltd.'s (B/Stable) proposed US dollar senior unsecured notes a rating of 'B' with a Recovery Rating of 'RR4'. The proceeds will be used to refinance existing onshore debt.
The proposed notes are rated at the same level as Radiance's senior unsecured rating because they will constitute its direct and senior unsecured obligations. The proposed notes will be issued by Radiance's wholly owned subsidiary, Radiance Capital Investments Limited, and will be unconditionally and irrevocably guaranteed by the parent.
Radiance's ratings are supported by its diversified and quality land bank that is focused in tier-two cities across six regions in China. This provides a strong asset base for sustainable contracted sales scale and growth. The company's ability to acquire large low-cost land parcels in its core markets helps to maintain its healthy margins, despite a moderate churn rate, measured by attributable contracted sales/gross debt, of 1.1x-1.2x.
The ratings are constrained by high leverage - measured by net debt/adjusted inventory, with joint ventures (JV) and associates proportionately consolidated - of around 60% at end-2019. We expect leverage to stay high over the next 12-18 months due to large land acquisitions and construction costs. The ratings are also constrained by weaker financial transparency compared with listed peers, especially in publishing operational data to support its financial-statement performance, and the lack of an execution record in meeting financial-management targets.
KEY RATING DRIVERS
High Leverage Constrains Ratings: Fitch expects leverage to stay high over the next 12-18 months, assuming the company uses 50%-55% of attributable sales proceeds for land acquisitions and a larger portion of sales proceeds than in the previous three years for construction costs, as the delivery of pre-sold projects picked up in 2019. The company's leverage of 59% in 2019 was higher than the below 50% leverage of most 'B+' peers.
Insufficient Disclosure: Radiance has an ESG relevance score of 4 for financial transparency, as there is limited disclosure of operational information to support its financial-statement performance compared with listed companies, even though it discloses financial information half yearly due to its outstanding domestic bonds. Radiance also lacks an execution record of setting and meeting financial-management targets, especially in controlling leverage and maintaining healthy liquidity. These factors constrain Radiance's ratings, especially when viewed in conjunction with its high leverage.
Diversified and Sufficient Land Bank: Radiance's diversified and sufficient land bank, with a focus in provincial capital cities and municipalities, should support sustainable contracted sales growth and flexibility in land acquisitions, leaving room for deleveraging. Radiance had 144 projects across 30 cities in south, south-west, north-west and east China, as well as the Yangtze River Delta and the Bohai Rim, at end-2019. Its geographical concentration is balanced, with no area accounting for more than 25% of total sellable resources. Its land bank gross floor area (GFA), including total GFA from consolidated projects and attributable GFA from JVs, of 26.7 million square metres at end-2019 was sufficient for three to four years of development.
Access to Low-Cost Land: Radiance's development projects are profitable due to its acquisition of large parcels of cheap land from facilitating urbanisation and enhancing value for local governments. Following the successful development of new areas in Chongqing, Xi'an, Fuzhou and Huai'an, the company acquired another two large land parcels in the city of Xi'an and Wuhan at very low cost in 2018. The average cost of Radiance's land bank was around CNY4,000/square metres, or 30% of its average selling price (ASP), at end-1H19.
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