The rating action on RLT's outstanding debentures follows the 4 April 2022 revision of the Outlook on guarantor CGH's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, and affirmation of the IDR at 'BBB-'. A one-notch downgrade of CGH's Long-Term IDR could result in a multiple-notch downgrade to the National Long-Term Ratings on RLT's guaranteed debentures.
KEY RATING DRIVERS
The ratings on RLT's guaranteed debentures reflect the credit enhancement provided to investors by the full, unconditional and irrevocable guarantee by RLT's parent, CGH. The guarantee ranks at least pari passu with CGH's unsecured and unsubordinated obligations.
The Negative Outlook on CGH's IDR is driven by decreasing contracted sales and sales collection since 3Q21, as well as a declining profit margin in the Chinese property sector. CGH has been able to access the capital market, but the difficult funding access and operating environment for Chinese property developers adds to the uncertainty. CGH's leverage is higher than that of most investment-grade peers.
CGH's rating is supported by its business scale as one of China's largest property developers with a diversified land bank. It has sufficient land reserve to support its large contracted sales scale, and a satisfactory record of responding to changing market conditions, including adjusting its city-tier mix. Fitch expects CGH's margin to improve in the next one to two years on lower land acquisition costs.
DERIVATION SUMMARY
The ratings on RLT's guaranteed debentures are based entirely on the credit profile of the guarantor, CGH, a leading homebuilder in China with one of the most well-diversified land banks among peers. The land bank helps CGH sustain sales through business cycles. CGH has a significantly larger operating scale and greater geographical diversification of cash flow than peers in Thailand, such as Thai Beverage Public Company Limited (ThaiBev, BBB-/AA(tha)/Stable), the country's market leader in spirits and beer. ThaiBev's smaller scale is offset by its dominant market position in spirits in Thailand.
CGH has lower financial leverage than ThaiBev over the medium term. However, CGH is facing declining sales and profit margins as well as a challenging operating environment for Chinese property developers, driving our Negative Outlook. Both companies have the same Long-Term IDR. Therefore, the ratings on RLT's guaranteed debentures are at the same level as ThaiBev's National Rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- We do not expect an upgrade in the next 12-18 months given the guarantor's IDR is on a Negative Outlook;
- The Outlook on RLT's debentures will be revised to Stable if the Outlook on CGH's IDR is revised to Stable.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of CGH's Long-Term IDR.
A one-notch downgrade in CGH's Long-Term IDR could result in a multiple-notch downgrade to the National Long-Term Rating on RLT's guaranteed debentures.
For CGH's rating, the following sensitivities were outlined by Fitch in our Rating Action Commentary on 4 April 2022:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook will be revised to Stable if contracted sales or sales collection stabilises, with no significant deterioration in leverage or liquidity.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Substantial decline in contracted sales or cash collection;
- Deterioration in liquidity or evidence of further weakening in capital-market access;
- Net debt/net property assets at above 45% for a sustained period;
- EBITDA margin before joint ventures at below 10% for a sustained period.
ISSUER PROFILE
RLT is 100% indirectly owned by CGH, a leading home builder in Guangdong, China. RLT launched its first two projects in Thailand in 2018. It now has seven condominium and low-rise projects.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The rating of the debentures is based entirely on the rating of the guarantor, CGH.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings