Golden Wheel Tiandi Holdings Co. Ltd. Outlook Revised To Negative On Higher Liquidity #B# Rating Affirmed

Stocks and Financial Services Press Releases Friday January 20, 2017 17:01
HONG KONG--20 Jan--S&P Global Ratings

HONG KONG (S&P Global Ratings) Jan. 20, 2017--S&P Global Ratings said today that it had revised its outlook on Golden Wheel Tiandi Holdings Co. Ltd. (GW Tiandi) to negative from stable. We affirmed our 'B' long-term corporate credit rating on the China-based property developer and the 'B' long-term issue rating on its senior unsecured notes. At the same time, we lowered our long-term Greater China regional scale ratings on the company and the notes to 'cnB+' from 'cnBB-'.

"We revised the outlook to negative to reflect GW Tiandi's higher refinancing risk because of its large maturities due in the next 12 months," said S&P Global Ratings credit analyst Yane Yu. We also expect the company's financial leverage to remain high over the next 12 months despite improved contracted sales

The company's liquidity has weakened because its short-term borrowings have risen to about 40% of its total debt as of 2016 (from about 26% in 2015). This figure does not include borrowings with a payment-on-demand clause because we expect the loans to continue to be rolled over due to their fully secured nature. The company has two senior notes totaling about Chinese renminbi (RMB) 1 billion due in 2017. We have revised our assessment of GW Tiandi's liquidity to less than adequate from adequate based on the above factors.

GW Tiandi's liquidity could weaken further if the company is more aggressive in debt-funded land acquisitions or its contracted sales are lower than our base case. We believe the company's joint venture with Longfor Properties Co. Ltd. and Nanjing Hongyang Yemao Real Estate Co. Ltd. for the Nanjing project could temper the cashflow burden. GW Tiandi's stable rental income from commercial properties and metro malls could also support its liquidity to some extent. We also anticipate that the company's contracted sales will improve in the next 12-24 months based on its scheduled project launches.

We affirmed the rating on GW Tiandi because the company's sizable rental income from commercial properties and metro malls is likely to provide some stability to its volatile revenues from property development.
We believe GW Tiandi could face growing business risk from its shrinking saleable resources. We estimate that the company's undeveloped land bank could sustain contracted sales for about two years.
We expect GW Tiandi to become more aggressive in debt-funded acquisitions over the next 12 months.

GW Tiandi's small scale, long project cycle, and lumpy revenue recognition make its financial leverage highly volatile. We forecast the company's EBITDA interest coverage to be about 1x and its debt-to-EBITDA ratio to be above 10x in 2016. We expect the debt-to-EBITDA ratio to moderately improve to about 8x in 2017 and EBITDA interest coverage to strengthen to 1.5x-2x in 2018 as more projects are complete.

GW Tiandi is likely to maintain its strong EBITDA margin of over 30%, given a robust increase in prices in Nanjing in the past 12 months and the low land-acquisition costs in 2013-2014.
We expect GW Tiandi's rental income from investment properties and its growing portfolio of metro malls to continue to generate stable recurring income for the company.

We anticipate that the rental income will cover more than 50% of GW Tiandi's gross interest expenses in the coming 12 months. We continue to reflect this factor in a one-notch uplift in our comparable ratings analysis.

"The negative outlook on GW Tiandi over the next 12 months reflects the uncertainty over the company's sales prospects owing to its decreasing saleable resources," said Ms. Yu. "We expect GW Tiandi's acquisition appetite to increase amid rising land costs. At the same time, the company's refinancing risk could heighten due to its large maturities over the period."

We may lower the rating under the following situations:

GW Tiandi's revenue from property development does not significantly improve, such that its EBITDA interest coverage falls below 1.5x and its debt-to-EBITDA ratio does not improve to about 8x in 2017; The company's sources of liquidity are materially insufficient to cover its uses, resulting in a weak liquidity assessment.

This could happen if GW Tiandi's contracted sales in 2017 are below RMB1.5 billion or the company cannot roll over or refinance its loans due; orGW Tiandi's ratio of rental income to interest expenses falls below 50%.

We may revise the outlook to stable if GW Tiandi's rental income continues to grow steadily and the company is disciplined in its debt-funded land acquisitions.
GW Tiandi's ratio of rental income to interest expenses growing to about 70% would indicate such improvement.

At the same time, we expect the company to have greater clarity on its future strategic direction on property development and property investments, such that its financial leverage stabilizes and liquidity position improves.

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