HONG KONG, 24 March 2020. Pengyuan International has affirmed Central China Real Estate Limited’s (CCRE’s) global scale long-term issuer credit rating (LTICR) of ‘BB’. The outlook is stable.

CCRE is a Chinese property developer with 93%, 4%, 2% and 1% of its revenue from property development, project management, hotel services and rental income respectively in the first half of 2019. CCRE’s rating reflects its leading market position in Henan province and strong cashflow efficiency. On the other hand, CCRE’s rating is constrained by its highly concentrated exposure to the property market in Henan.

The stable outlook for CCRE reflects Pengyuan International’s expectation that although CCRE’s contracted sales growth might slow down in 2020 due to COVID-19, CCRE would be able to maintain its leading market position in Henan on the back of policy support from the Henan provincial government.

RATING RATIONALE

Credit Strengths

Market leader in Henan province. Having taken root in Henan for 27 years, CCRE has established its presence in the province’s 18 prefecture-level cities and 77 county-level cities by 30 June 2019. CCRE ranked as the top developer in Henan by contracted sales. CCRE’s market share in Henan in terms of attributable contracted sales increased from 2.9% in 2016 to 6.1% in 2019, based on our estimates. As of 31 December 2019, the Company had attributable land reserve with a gross floor area (GFA) of 40.57 million square metres (sqm) at a low average cost of RMB1,209 per sqm. We estimate the land bank life to be around 4.4 years and the land reserve is sufficient to support its expansion.

Strong contracted sales growth and cashflow efficiency. CCRE achieved a strong contracted sales growth of 73% and 28% on a consolidated basis in 2018 and 2019 respectively. Thanks to its strong contracted sales and execution capability, CCRE has seen improved cashflow efficiency in the past few years. By our estimates, the company maintained a high sell-through rate of 252% and 256% in 2018 and 2019 respectively. CCRE also recorded a high and stable three-year average cash collection ratio of 92% during the period of 2016-2018. Although its cashflow efficiency might be adversely affected by COVID-19 due to delays in construction and property sales in early 2020, we expect CCRE’s cashflow efficiency would recover after COVID-19 has been brought under control in Henan. In addition, the Henan Provincial Department of Housing and Construction, the Development and Reform Commission and seven other government departments have implemented 18 policies to support property developers in the province by stabilizing land supply and property prices.

Diversifying into project management. CCRE is expanding its project management services, which will generate an alternative source of revenue and improve the company’s profitability in the long term. We believe project management, which applies an asset-light model, has synergies with its property development business. We expect the project management business to record steady growth in 2020 driven by its abundant project pipeline. As of 30 June 2019, CCRE has signed 131 projects under CCRE’s management entrustment contracts with a planned GFA of around 19.91 million sqm and estimated management fees totaling RMB4.085 billion to be received in the coming 3-4 years.

Adequate liquidity. We estimate CCRE’s 12-month forward-looking cashflow liquidity to be 3.4x. We believe the company has adequate liquidity in the next 12 months, thanks to its strong cash position, positive funds from operations (FFO) and healthy debt structure. CCRE has recorded positive FFO and kept its short-term debt to total debt ratio below 30% in the past 7 years.

Credit Weaknesses

Increased leverage. CCRE is expanding with increased leverage and targeting to achieve full coverage of all counties and districts in Henan. The Company has increased its gross debt to total capitalization to 71% as of the first half of 2019 from 66% in 2018, on our estimates. We expect the gross debt to capitalization ratio will be around 68% at the end of 2019. We expect the net debt to adjusted inventory will increase to 49% in 2019 from 36% in 2018 before falling to 43% in 2020.

High geographical concentration. CCRE is a regional-focused property developer, with most of its land reserves in Henan. The lack of geographical diversity leaves CCRE exposed to economic cycles and regulatory changes in Henan. Therefore, the extent to which COVID-19 affects the operations and profitability of CCRE depends highly on the severity and number of confirmed cases in Henan as well as policy support from the provincial government.

Smaller scale. CCRE has a relatively small scale as measured by recognized revenue among Chinese and non-Chinese property developers. CCRE was ranked 48 among property developers in China in 2019 according to attributable contracted sales. We estimate the company’s attributable contracted sales to be RMB55 billion and RMB60 billion in 2019 and 2020 respectively. This is around one-tenth of the contracted sales of the top player in China.

RATING OUTLOOK

The stable outlook for CCRE reflects Pengyuan International’s expectation that although CCRE’s contracted sales growth might slow down in 2020 due to COVID-19, CCRE would be able to maintain its leading market position in Henan on the back of policy support from the Henan provincial government.

We would consider downgrading CCRE’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by 1) Leverage increasing substantially on a sustained basis; 2) EBITDA margin declining substantially with little prospect of recovery; 3) A marked deterioration of operating profile.

We would consider upgrading the company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) Leverage decreasing substantially on a sustained basis; 2) EBITDA margin increasing significantly with likelihood of sustained growth; 3) Substantial improvement in operating profile.

 

Note: ratings mentioned in this press release are unsolicited ratings.

ANALYSTS CONTACT

MEDIA CONTACT

OTHER ENQUIRIES

Primary Analyst

Simon Lee, CFA

+852 3615 8307

simon.lee@pyrating.com

 

Secondary Analyst

Winnie Guo

+852 3615 8344

winnie.guo@pyrating.com

 

 

Committee Chair

Tony Tang

+852 3615 8278

tony.tang@pyrating.com

 

media@pyrating.com

contact@pyrating.com

 

Date of Relevant Rating Committee: 16 March 2020

Additional information is available on www.pyrating.com

Related Criteria

Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

General Corporate Rating Criteria (15 March 2018)

Industry Credit Guidelines Chinese Homebuilders and Property Developers (31 August 2018)


 

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