China Jinmao Holdings Outlook Revised To Stable On Improving Business Diversity, Parent #BBB-# Rating Affirmed

Stocks and Financial Services Press Releases Wednesday September 6, 2017 17:47
HONG KONG--7 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 6, 2017--S&P Global Ratings revised its outlook on China Jinmao Holdings Group Ltd. (Jinmao) to stable from negative. At the same time, we affirmed our 'BBB-' long-term corporate credit rating on the China-based property and land developer and our 'BBB-' long-term issue rating on the company's outstanding guaranteed senior unsecured notes.

We revised the outlook on Jinmao to stable because we expect the company to expand its business in a controlled manner over the next two years and maintain a balanced business mix, above-average profitability, and sound financial management.

We affirmed the ratings on Jinmao to reflect the company's better business diversity than peers', stronger ongoing support from parent Sinochem Group, and stable leverage over the next two years.

In our opinion, Jinmao's enlarged primary land development business since 2016 has improved its business mix. We expect the company's highly profitable primary land development business to contribute 10%-15% of its annual contracted sales over the next 12-24 months. The segment should continue to generate gross margins of over 50%, helping Jinmao to maintain an overall EBITDA margin of more than 30% over the next two years. In 2017, the company has entered into new strategic cooperation agreements in six cities, which should support its primary development project pipeline.

In our view, Jinmao's business mix is more diversified and balanced than peers', which will also help the company to maintain above-average profitability and stable cash flows. Jinmao's investment property and hotel businesses continue to perform well owing to their established franchise. We expect these businesses to contribute over 10% of the company's revenue in 2017.

While we expect Jinmao's geographical diversity in its secondary property development business to improve, profitability in this segment is likely to decline over the next two years. The company's average cost of new land acquired exceeded Chinese renminbi (RMB) 12,000 per square meter (sqm) in 2016 and RMB15,000/ sqm in 2017 (year-to-date). Therefore, we believe Jinmao's gross profit for new projects in this segment will reduce over the next two years, given the company's limited ability to increase its average selling price in tier-1 and tier-2 cities under the current policy conditions.

We believe Jinmao's closer operational ties with Sinochem Group has given it greater financial and operational flexibility. In 2016, Sinochem Group acquired two land parcels in Wuhan and Tianjin for more than RMB14 billion and granted Jinmao the call option for future purchase under the group's non-competition undertaking. We expect such an arrangement between Jinmao and Sinochem Group to become an open option, allowing Jinmao to seize unexpected

land opportunities without putting extra burden on its balance sheet. In addition, this year Jinmao has used US$500 million of the US$3 billion quota for offshore bonds allocated to Sinochem Group by the National Development and Reform Commission. We have given Jinmao a one-notch rating uplift in our comparable rating analysis due to this factor and the company's better business mix than peers.

We expect Jinmao's revenue growth on a consolidated basis to slow down in 2018 and 2019 due to a significant increase in sales at joint venture projects. We estimate that these projects will contribute 30%-35% of secondary property development contracted sales starting from 2017. In 2016 and 2017 (year-to-date), Jinmao's attributable interest for new land acquired was below 50%. Jinmao's joint-venture partners are evenly split between developer peers and financial investors, demonstrating the company's ability to source partners and distribute risks. Jinmao has not provided any third-party guarantees to those projects. We estimate that Jinmao's off-balance-sheet debt does not significantly elevate the company's see-through leverage because the leverage of the joint-venture projects is generally in line with that of the consolidated projects, if we consider the full development cycle.

We expect Jinmao's leverage (as measured by the ratio of debt to EBITDA) to stay at 5.5x-6.0x over the next two years, supported by strong sales growth and a manageable new land-acquisition budget. Despite a material increase in

debt in the first half of 2017, the company's debt-to-EBITDA ratio for the 12 months ended June 2017 rose only slightly to 5.8x, compared with 5.6x in 2016, given the strong growth in revenue booking. In our view, Jinmao is on track to achieve its RMB58 billion sales target for 2017; its guidance of RMB80 billion for 2018 and RMB100 billion for 2019 is also attainable, in our view.

The stable outlook reflects our view that Jinmao's financial leverage will stabilize over the next 12-24 months because the company's debt-funded expansion is balanced by solid sales and growth in revenue and EBITDA. We expect Jinmao's margin to mildly decline but remain above the industry average, helped by the company's profitable primary land development operations and robust investment property and hotel businesses.

We could downgrade Jinmao if the company's debt expansion is faster than we expect or if the improvement in its contracted sales and margin is materially weaker than our base case. Indications of such weakness are: (1) the

debt-to-EBITDA ratio rising to significantly above our expectation of 5.0x-6.0x; and (2) EBITDA interest coverage falling below 3.0x, factoring in the financial positions of joint venture projects.
We could also lower the rating if Sinochem Group's group credit profile weakens by more than two notches, or our assessment of parental support weakens.

We could upgrade Jinmao if the company can consistently control its debt-funded expansion, such that its debt-to-EBITDA ratio improves to stay below 4.5x. This could happen if the company's sales and profitability significantly exceed our expectation while it controls its appetite for debt expansion. We could also raise the rating if our assessment of parental support strengthens.

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