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Rating Action:

Moody's assigns first-time B2 rating to Sunriver Holding Group Company Limited

 The document has been translated in other languages

Global Credit Research - 05 Feb 2018

Hong Kong, February 05, 2018 -- Moody's Investors Service has assigned a first-time B2 corporate family rating (CFR) to Sunriver Holding Group Company Limited (Sunriver). The rating outlook is stable.

RATINGS RATIONALE

"Sunriver's B2 CFR reflects its track record of real estate development in the province of Anhui, as well as its above peer-average profitability," says Cedric Lai, a Moody's Assistant Vice President and Analyst.

Property development is Sunriver's largest business segment, contributing 60%-65% of its total gross profit of RMB1.4-2.1 billion during 2015-16. Moody's forecasts gross profit from the property development segment will contribute around 60% of its total gross profit of RMB2.6-3.2 billion over the next 12-18 months.

Sunriver operated nine residential real estate projects at the end of September 2017, with a focus in Anhui Province, mainly in the cities of Hefei and Fuyang.

The company achieved high gross development margins of 32%-40% in the last two years because of its low-cost land bank and strong average selling price growth in Hefei and Fuyang. These gross profit margins are high when compared with Moody's B-rated Chinese property developers. Moody's forecasts Sunriver's gross profit margin will remain around 33%-34% over the next 12-18 months, supported by continued strong growth in average selling prices in both Hefei and Fuyang during 2016 and 2017.

At the end of September 2017, the company had total saleable resources with a gross floor area of around 10.6 million square meters from nine residential projects, which will support the company's sales and cash flow generation in the next two years. The company does not plan to significantly expand its land bank beyond these resources, and plans to instead use its property sales cash flow to fund the expansion of its tourism segment. The company did not have any outstanding unpaid land premium as of September 2017.

Sunriver's infrastructure construction segment provides modest business diversification and does not negatively impact the company's credit profile, as it does not have material debt funding needs. Infrastructure construction is the company's second largest business segment with an operating track record that dates back to 2002. The segment contributed about 17%-24% of Sunriver's total gross profit during 2015-16. Moody's expects the contribution will decline to 11%-13% in next 12-18 months given the expanding tourism segment.

The segment undertakes under engineering, procurement and construction (EPC) projects such as toll roads, bridges and municipal roads, primarily within Anhui Province. The company had 46 projects as of September 2017 which will support the segment's revenue over the next 12 to 18 months.

"Sunriver's B2 CFR is constrained by its small scale, geographic concentration, debt-funded expansion into relatively new tourism businesses as well as limited financial flexibility because of its high level of secured borrowings," adds Lai, also Moody's Lead Analyst for Sunriver.

The company's scale is small when compared with its B-rated peers -- as measured by revenue of around RMB7.1 billion in 2016 -- although Moody's forecasts revenue to increase to around RMB10 billion in the next 12-18 months.

Sunriver's geographic concentration risk is high, with a high proportion of revenue derived from its real estate development and construction business in Anhui Province. While net population inflow into Hefei and Fuyang will support the company's sales, regulatory tightening could be stepped up if prices continue to rise rapidly in these cities.

Sunriver is expanding its another core business by developing and acquiring tourism attractions, raising both its debt funding needs and execution risk. The company plans to develop three new tourist attraction areas around Hefei and Fuyang as well as to acquire mature tourist attraction areas, with total capital expenditure and investments for the segment estimated at RMB2.5 billion per annum in the next 2-3 years. The company completed a self-developed project at Mount Qiyun Tourism Project in 2017 and is expected to complete the Fuyang Yinghuai Ecological Tourism Project by 2018.

Sunriver also acquired three mature tourism attractions, namely Fenghuang Ancient Town and Huanglong Dong and Danxia Mountain in 2016-17.

Sunriver's B2 CFR is also constrained by its private company status, less diversified funding access and weaker corporate governance when compared with listed companies.

Sunriver's liquidity is adequate, as shown by its cash/short-term debt of 193% as of the end of June 2017. The company has raised corporate onshore bonds, including private placements, of around RMB2.85 billion since 2013.

The company's debt leverage ratio -- as measured by revenue to adjusted debt -- was at 74% in 2016 and 117% in 2015. Moody's expects the company's debt leverage will trend towards 65%-70% in the next 12-18 months, in the absence of aggressive land acquisition spending. Such levels position it appropriately at the B2 rating level.

Moody's expects Sunriver's interest coverage -- as measured by adjusted EBIT to interest -- will weaken to around 1.6x over the next 12-18 months, from 2.4x in 2016, as the company's gross profit margins will partly offset an increase in interest expenses arising from its increasing debt level.

The stable rating outlook reflects Moody's expectation that Sunriver will maintain (1) its gross margins for its real estate development and construction businesses; (2) an adequate liquidity position; and (3) a prudent approach towards its investments in the tourist segment without substantially escalating its debt level.

The rating could be upgraded if Sunriver improves its debt leverage while achieving healthy contracted sales growth, and demonstrates prudence in expanding its tourism segment. Credit metrics indicative of a possible upgrade include (1) revenue/adjusted debt above 80%; and (2) adjusted EBIT/interest cover above 2.0x-2.5x on a sustained basis.

The rating could be downgraded if there is a deterioration in Sunriver's debt leverage or liquidity position, such as increased refinancing risk. Deteriorating credit metrics that could trigger a ratings downgrade include (1) revenue/adjusted debt below 55%-60%; or (2) adjusted EBIT/interest cover below 1x on a sustained basis.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Founded in 2002, Sunriver Holding Group Company Limited is a privately owned company with its headquarters in Hefei, Anhui Province in China. It engages in real estate, construction, tourism and cultural businesses in China. As of June 2017, it had nine property development projects with an aggregate gross floor area of 8,435,522 square meters. The company was 82.4% owned by its chairman, Mr. Yu Faxiang and his brother Mr. Yu Shuixiang as of October 1, 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Cedric Lai
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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