Fitch Ratings has assigned China-based Redsun Properties Group Limited's (B+/Stable) proposed US dollar senior notes a rating of 'B+' and a Recovery Rating of 'RR4'.

The notes are rated at the same level as Redsun's senior unsecured rating as they constitute its direct and senior unsecured obligations. Redsun plans to use the proceeds to refinance existing debt and for general corporate purposes.

Redsun is a subsidiary of Hong Yang Group Company Limited (B+/Stable). Fitch rates both companies on a consolidated basis, according to its Parent and Subsidiary Linkage Rating Criteria, as Redsun represents the group's entire exposure to the China homebuilding business.

The group's ratings reflect its expanded contracted-sales scale, supported by improved land-bank diversification and a prudent financial policy, which has kept leverage below 50%, a healthy level among 'B+' rated peers. The group also has a higher level of non-development income than peers, arising from the larger scale of its property-rental business and expanding property-management business. The ratings are constrained by an attributable sales scale that is smaller than that of 'BB-' rated peers and the pressure to build up land bank to pursue sustained sales growth.

KEY RATING DRIVERS

Sales Continue to Rise: Fitch expects the group's total contracted sales to rise moderately by 5% after its total contracted sales increased by 28% to CNY74.3 billion in 11M20, driven by its sufficient saleable resources, mainly in Jiangsu province and other cities in the Yangtze River Delta, where demand remains strong. We estimate that the group exceeded its total contracted sales target of CNY75 billion in 2020.

Moderate Leverage: We forecast leverage, measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, to remain at 40%-45% in 2021, similar to the 2020 level (2019: 42%), which is reasonable among 'B+' rated peers. The group slowed its land acquisition by spending 0.5x of contracted sales proceeds on land in 2020, compared with 0.6x in 2019. This preserves a reasonable land-bank life of around three years and continue to diversify its land-bank portfolio.

Diversified Land Bank: The group had a total land bank of 18.4 million square metres as at June 2020, sufficient for about three years of development. Fitch expects the group to further diversify its land bank by reducing the proportion held in Jiangsu province, where it is based, to around 50% in 2021, from 58% in 2019, widening its exposure to 38 cities.

Stable EBITDA Margin: We estimate that the group's EBITDA margin, after adding back capitalised interest in cost of goods sold, was stable in 2020, after falling to 22% in 2019, from 28% in 2018, due to the recognition of revenue from more projects as it expands into cities beyond Jiangsu province. The group will continue to face margin pressure as it expands outside Jiangsu, but we expect its selling and administrative expense/revenue ratio to drop as revenue recognition increases and to support the EBITDA margin.

Expanding Non-Development Businesses: The group's non-development businesses comprise investment properties and property management. Investment property rental revenue mainly comes from malls for retail and wholesale of household construction and decoration materials in Nanjing, which enjoy nearly full occupancy. Fitch expects faster revenue growth for the property-management business due to a pick-up in the delivery of the group's completed gross floor area in 2019, and potential acquisitions. Non-development EBITDA covered cash interest by about 0.2x in 2019, higher than the ratio at most 'B+' rated peers.

DERIVATION SUMMARY

The group's business and financial profile is similar to that of 'B+' rated peers, such as Helenbergh China Holdings Limited (B+/Stable), Hong Kong JunFa Property Company Limited (B+/Stable) and Fantasia Holdings Group Co., Limited (B+/Stable). The group's attributable contracted-sales scale of CNY30 billion-40 billion in 2020 was smaller than 'BB-' peers' scale of more than CNY50 billion. The group's ratings are also constrained by leverage (net debt/adjusted inventory) of slightly above 40%, higher than that of 'BB' peers.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Flat total contracted sales by gross floor area in 2020, increasing by 5% in 2021 and 2022

Contracted average selling price up by 8% in 2020, rising by 3% in both 2021 and 2022

Property development gross profit margin (after adding back capitalised interest) of about 30% in 2020-2022

Land-acquisition cash outflow to account for 50% of pre-sales proceeds in 2020-2022

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Scale expands to a level that is comparable with that of 'BB-' peers

Leverage, measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, sustained below 40%

Available cash/short-term debt sustained above 0.8x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA margin, excluding capitalised interest from cost of goods sold, sustained below 20%

Leverage, measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, sustained above 50%

The above ratios are based on the parent's - Hong Yang - consolidated financial data.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Sufficient Liquidity: Redsun had a cash balance of CNY18.3 billion, including restricted cash and pledged deposits of CNY2.8 billion and CNY5.8 billion, respectively, and short-term borrowings of CNY11.8 billion at end-June 2020. Redsun had CNY5.2 billion in onshore debt pledged against offshore cash deposits. Excluding the CNY5.2 billion in short-term debt, available cash, excluding restricted and pledged cash deposits, can cover short-term debt.

DATE OF RELEVANT COMMITTEE

04 August 2020

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 ACTIONS

ENTITY/DEBT	RATING	RECOVERY

Redsun Properties Group Limited

senior unsecured

LT	B+ 	New Rating	RR4

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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