China Resources Land Ltd Robust Fundamentals and SOE-Link to Insulate from CNY Volatility

28 June 2016

Credit Brief

China Resources Land Ltd

Robust Fundamentals and SOE-Link to Insulate from CNY Volatility   

Key Credit Highlights                                                                         

¨      We are mild overweight on China Resources Land (CR Land) on its sizeable exposure to Tier 1 and 2 cities with strong price growth, robust credit profile and liquidity as well as the support from its main State-Owned shareholder, China Resources Holdings Group (CR Group). CR Land’s FY2015 revenue rose 15% YoY to HKD103.4bn while net income saw a 16% increase to HKD17.5bn, driven by the 14% YoY rise in property development segmental revenue to HKD93.5bn (which comprises close to 90% of total revenue), while its property investments arm outperformed with a 22% YoY increase. Its credit profile continues to appear robust, with Total Debt/ EBITDA improving to 2.8x (FY2014: 3.9x) while EBITDA Interest Coverage is strong at 22.8x (FY2014: 29.5x). In addition, it has a sufficient Cash/ ST Debt buffer of 3.2x (FY2014: 2.1x).

¨      Prices in Tier 1 and 2 cities outperform lower tier cities, though recent policy tightening in Tier 1 cities might slow price growth. China’s government has enacted macroeconomic loosening policies and eased mortgage regulations to support the housing market. Property prices have rebounded with Tier 1 and 2 cities outperforming those of Tier 3 and below cities. The higher housing inventory in Tier 3 cities (~17 months), if compared to Tier 1 (~8 months) and Tier 2 cities (~10 months) will continue to discourage meaningful price recovery in Tier 3 cities and below. In Mar-2016, Tier 1 local governments such as Shenzhen and Shanghai announced policies to slow property price growth. It is too early to ascertain the effects of the latest measures, but expectations remain that property prices in Tier 1 and 2 cities will outperform those of the lower tiers in the medium term, albeit at a slower pace.

¨      Positive on CR Land’s 90% revenue exposure to improving prices in Tier 1 and 2 cities. CR Land is predominantly a property developer, with around 90% of revenue from the property development space. In addition, 90% of its contracted sales are from Tier 1 and Tier 2 cities which have seen better price improvements compared to Tier 3 and below cities. Despite the tightening in policies in some Tier 1 cities, we believe the lower housing inventory and continued urban migration will prevent a strong price decline.

¨      Support from State-Owned shareholder. China Resources Land is 61.2% owned by CR Group, a China State-Owned Entity (SOE), forming an integral and strategic part of the CR Group. We believe that the linkage will remain, though any major changes in shareholding (below 50%) will have a negative impact on its rating. In addition, CR Group frequently injects assets into CR Land, such as at end-2014 when CR Land acquired five properties from CR Group for HKD18.6bn.

¨      Moderate landbanking expansion allows preservation of its good credit profile.  In FY2015, CR Land acquired 5.11m sqm of land, increasing its landbank by 14% to 41.26m sqm. This was modest if compared to the aggressive players such as Country Garden (increasing landbank by 53%) or Evergrande (by 22%) which have been keen to expand their landbank towards Tier 1 and 2 cities.

¨      Robust credit profile coupled with longer-dated bond maturities. CR Land has a robust and improving credit profile, with Total Debt/ EBITDA at 2.8x (FY2014: 3.9x) and EBITDA Interest Coverage at 22.8x (FY2014: 29.5x). It has no short-term liquidity issues with Cash/ ST Debt at a comfortable 3.2x. Looking ahead, CR Land’s term loan and bond maturities appear well staggered, with the exception of its lumpy 2019 maturities with around HKD7.8bn in term loans and HKD8.6bn in bond principal maturing. We opine that there shouldn’t be any redemption concerns as it has a healthy cash balance of HKD45.8bn which is sufficient to redeem all current outstanding term loans and bond principals which mature in the next 5 years. In addition, its CFO has been positive, averaging around HKD18.7bn in the past four years.  

¨      High exposure to foreign debt. Foreign debt has been reduced to 47% in FY2015 (FY2014: 62%), though still high compared to the Chinese property average of around 30-35%. Of the 47%, 28% comprises of USD debt whilst the remaining 19% encompasses HKD debt. That said, the preference for IG rated bonds in the Chinese universe and the SOE parentage should help insulate it from any short-term investor concerns and drastic volatility.