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.
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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.
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Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's assigns first-time Baa3/(P)Ba1 ratings to Franshion