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Rating Action:

Moody's assigns first-time Baa3/(P)Ba1 ratings to Franshion

01 Apr 2011

Hong Kong, April 01, 2011 -- Moody's Investors Service has assigned a first-time Baa3 corporate family rating to Franshion Properties (China) Limited.

Moody's has also assigned a provisional (P)Ba1 rating to Franshion's proposed USD senior unsecured bond issue.

The outlook for both ratings is stable.

The proceeds from the proposed bonds will be used for working capital, refinancing of outstanding indebtedness, capital expenditures and other general corporate purposes.

The provisional status of the bond rating will be removed upon completion of the bond issue.

RATINGS RATIONALE

"Franshion's Baa3 corporate family rating reflects the company's credit strength, which is based on its portfolio of quality investment properties, including prime office buildings and hotels in Shanghai and Beijing. Rental income provides the company with stable cash flow and a strong cushion to offset any volatility in cash flow, in contrast to its rated Chinese property peers," says Kaven Tsang, a Moody's AVP/Analyst.

"Franshion's projected financial metrics, with adjusted debt/capitalization around 40-45% and EBITDA interest coverage 5-6x, are comparable to those of its mid- to high Ba-rated property peers," says Tsang, also Moody's lead analyst for Franshion.

"Its adjusted recurring EBITDA, comprising net rental income and 50% of hotel EBITDA, can fully cover its projected gross interest expenses, giving the company the strongest coverage position of all the rated Chinese developers."

"This favorably positions it against peers whose income is derived mainly from the cyclical and volatile development business," he adds.

The rating is further supported by the company's solid track record in the development of landmark, integrated projects and in the acquisition of strategically important projects through its collaboration with government-related entities.

The Baa3 rating also takes into account Franshion's diversified and solid access to both on- and offshore funding, which is supported by its status as a quasi-state-owned enterprise and as a 62.87%-owned subsidiary of Sinochem Hong Kong (Group) Company Limited (Baa1/stable).

However, Franshion's rapid growth plan will entail execution risk, as the company will have to achieve unprecedented sales targets in an uncertain operating and regulatory environment. Rapidly expanding residential development projects and a lack of geographic diversity will raise the company's exposure to performance volatility. Revenue growth in the next two to three years will also rely on a small number of projects, compared with other rated property peers.

Franshion's bond rating is notched down to Ba1, reflecting structural and legal subordination. The ratio of secured and subsidiary debt to total assets stood at 28.9% as of end-2010. After the bond issue, the ratio should remain at 15-20% for the next year or two.

The stable outlook reflects Moody's expectation that Franshion will maintain 1) its focus on its commercial and integrated developments in first- and major second-tier cities in China and 2) a stable credit profile, with adjusted recurring EBITDA to cover projected interest expenses in full.

The rating could be downgraded if Franshion 1) fails to implement its business plan -- or China's property market experiences a significant downturn, such that cash flow is weaker than anticipated; 2) accelerates its development plans or makes any aggressive land acquisitions without a corresponding increase in cash inflow; or 3) significantly increases its investments in residential properties, materially altering its risk exposure and credit profile.

Moody's would regard the following financial metrics as signals for downward rating pressure: 1) adjusted debt/capitalization consistently above 45-50%; 2) EBITDA interest coverage less than 4-5x; or 3) adjusted recurring EBITDA to interest coverage ratio less than 1x.

Upward rating pressure is limited in the near term in view of the company large, upcoming land premium payment and fast sales growth targets. However, positive rating pressure could emerge over time if Franshion can 1) achieve its planned sales growth targets with stable profit margins; 2) generate sales from a balanced portfolio without concentration risk; and 3) strengthen its recurring income such that adjusted recurring EBITDA exceeds 2-2.5x of its gross interest expenses.

Moody's would also regard the following as signals for upward rating pressure: 1) adjusted debt/capitalization consistently below 35% and/or 2) EBITDA interest coverage higher than 8x.

The principal methodology used in this rating was Global Homebuilding Industry published in March 2009.

Listed on the Stock Exchange of Hong Kong in 2007, Franshion Properties (China) Limited is a 62.87%-owned subsidiary of Sinochem Hong Kong (Group) Company Limited, which in turn is 98%-owned by Sinochem Group, a state-owned enterprise under SASAC. Franshion develops commercial and integrated properties in first- and major second-tier cities in China. As at December 31, 2010, Franshion has a land bank of approximately 2.3 million sq.m. of GFA.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Hong Kong
Kaven Tsang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
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JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time Baa3/(P)Ba1 ratings to Franshion
No Related Data.
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