Fitch Ratings has affirmed the ratings on
Fitch rates both companies on a consolidated basis, according to our Parent and Subsidiary Linkage Rating Criteria, as Fitch assesses the overall linkage as moderate.
The affirmation reflects the group's growing contracted sales, improving land-bank diversification and its ability to maintain modest leverage at around 40%, based on proportionately consolidated net debt/adjusted inventory. The group's ratings are constrained by its attributable sales and revenue scale, which are smaller than that of 'BB-' rated peers, while its EBITDA margin is also weaker than majority of peers rated 'B+'.
KEY RATING DRIVERS
Healthy Leverage: Fitch believes group leverage, measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, will rise to around 40% in 2021 (2020: 35%), which remains reasonable among 'B+' rated peers. The group expects to spend about half of its contracted sales proceeds on land in 2021, similar to that in 2020. The group has been able to control its leverage at a healthy level while expanding its scale over the past two years.
Sales Continue to Rise: Fitch expects the group's total contracted sales to rise by about 15% to
Margin to Stabilise: We expect the group's EBITDA margin, after adding back capitalised interest in cost of goods sold, to stabilise at about 18% in 2021. The EBITDA margin fell to 17% in 2020 from 18% in 2019, due to weaker margin in property development as the industry was increasingly competitive. Fitch expects the gross profit margin (before capitalised interest adjustment) for property development to stabilise at about 21% in 2021, as 35%-40% of the group's land acquisitions are from integrated projects and acquisitions, which have higher profitability than land from public auctions. Fitch also expects the selling and administrative expense/revenue ratio to drop as revenue increases.
Increasing NCI: The ratio of Hong Yang's non-controlling interests (NCI) to equity, excluding the NCI due to listed subsidiaries, increased to 30% in 2020 from 20% in 2019. This reflects Hong Yang's reliance on cash from contracted sales and capital contributions from non-controlling shareholders, which are mainly developers, to finance its expansion. This lowers Hong Yang's need for debt funding, but creates potential cash leakage and reduces further financial flexibility because homebuilders with lower NCIs can dispose of stakes in projects to reduce leverage.
Moderate Parent-Subsidiary Linkage: Fitch rates
DERIVATION SUMMARY
The group's leverage of 35% at end 2020 is similar to that of
Peers rated at 'BB-' generally have attributable contracted sales of more than
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Total contracted sales by gross floor area to increase by 5% per year in 2021 -2024
Contracted average selling price to increase by 8% in 2021, 5% in 2022 and 3% in 2023-2024
Property-development gross profit margin of about 21% in 2021-2024
Land-acquisition cash outflow to account for about 50% of annual pre-sales proceeds in 2021-2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Attributable contracted sales and revenue comparable with that of 'BB-' peers
Leverage, measured by proportionately consolidated net debt/adjusted inventory, sustained below 40%
No decrease in land bank life (defined by saleable land bank as of year-end divided by expected gross floor area sold in the next year)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA margin, excluding capitalised interest from cost of goods sold, sustained below 18%
Leverage, measured by proportionately consolidated net debt/adjusted inventory, sustained above 50%
All ratios are based on the parent's -
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: The group had available cash balance of
At end-2020, Redsun had available cash balance of
In
ISSUER PROFILE
Redsun focusses on developing residential properties in
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch's calculation of
Fitch included JV net debt of
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.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Redsun Properties Group Limited LTIDR B + Affirmed B+
senior unsecured
LT B+ Affirmed RR4 B+
senior unsecured
LT B+ Affirmed RR4 B+
Hong Yang Group Company Limited LTIDR B + Affirmed B+
senior unsecured
LT B+ Affirmed RR4 B+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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