Fitch Ratings has assigned homebuilder China SCE Group Holdings Limited's (BB-/Stable) proposed US dollar senior notes a rating of 'BB-'.
The proposed notes are rated at the same level as China SCE's senior unsecured rating because they will constitute its direct and senior unsecured obligations. China SCE intends to use the net proceeds from the proposed notes to refinance existing debt.
KEY RATING DRIVERS
Expanding Sales Scale: China SCE's total contracted sales increased by 26% to CNY101.5 billion in 2020 after rising 57% in 2019. Fitch expects the company's sales to rise by 5%-6% a year in 2021-2023, supported by its diversified saleable resources in the Yangtze River Delta, central and western China, the Bohai Rim, and the west coast of the Taiwan Strait. About 60% of China SCE's land bank is in Tier 1 and 2 cities where demand is more resilient and less affected by the Covid-19 pandemic.
Integrated Land Acquisitions: China SCE's land bank is sufficient for about three years of development. It focuses on acquiring land that integrates development and investment properties (including shopping malls and long-term rental apartments), which tends to be cheaper than land acquired at public auctions. This enables it to maintain a reasonable margin for development properties. Fitch expects its EBITDA margin (after adding back capitalised interest) to be fairly stable at 22%-24% in 2021-2023, compared with 22% in 2019.
Leverage Rising Gradually: Fitch expects China SCE's leverage, defined as net debt (including guarantees to joint ventures (JV) and associates)/adjusted inventory, to rise to about 45% in 2020-2023 from 41% in 2019, according to its budget for land replenishment and capex for investment properties. Fitch expects it to spend 60%-65% of its contracted sales proceeds to replenish land for both development and investment properties in 2021-2023, which means there is limited room for leverage to improve despite its sufficient land bank.
Rising Non-Development Income: China SCE's non-development income is mainly from rental of investment properties and property management fees. We expect its strong pipeline of new shopping malls and the increasing number of long-term rental apartments to help its non-development gross profit to more than double to CNY1.5 billion by 2023 from CNY0.7 billion in 2019. However, the amount of non-development income provides only limited support to its rating at the current level.
Non-Controlling Interest: China SCE's exposure to non-controlling interests (NCI), at 42% of total equity at end-2019 and 38% at end-June 2020, is higher than the average of 'BB-' rated peers. This reflects its reliance on capital contributions from non-controlling shareholders, which are mostly developers, to finance its expansion. This reduces China SCE's need for debt funding, but creates potential for cash leakage and reduces financial flexibility because homebuilders with lower NCI can dispose of stakes in projects to cut leverage.
DERIVATION SUMMARY
China SCE's attributable contracted sales of about CNY55 billion in 2020 is similar to that of Yuzhou Group Holdings Company Limited (BB-/Stable), but smaller than that of other 'BB-' rated peers such as Ronshine China Holdings Limited (BB-/Stable) and KWG Group Holdings Limited (BB-/Stable). Its land bank and geographical diversification are similar to that of 'BB-' peers.
China SCE's leverage, defined as net debt/adjusted inventory (including external guarantees), of 40%-45% is similar to that of Ronshine. China SCE's gross profit margin (after adding back capitalised interest) of about 30% is similar to that of Yuzhou, although its EBITDA margin of 22%-24% is lower due to higher selling and administrative expenses as a percentage of revenue recognised.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Contracted sales to increase by 6% in 2021 and 5% per year in 2021-2023 (2020: 26%)
Cash collection as a percentage of total sales at 90% in 2021-2023 (2019: 96%)
Land premium for development and investment outflow of around 60% of sales proceeds in 2021-2023 (2020: 65%)
Overall EBITDA margin, excluding capitalised interest, at 20%-25% in 2021-2023 (2019: 22%)
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Attributable contracted sales increase to a level that is comparable with that of 'BB' rated peers
Net debt (including guarantees to JVs and associates)/adjusted inventory sustained below 35%
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt (including guarantees to JVs and associates)/adjusted inventory above 45% for a sustained period
EBITDA margin (after adding back capitalised interest) sustained below 20%
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: China SCE had available cash of CNY20.7 billion, excluding restricted cash of CNY4.2 billion, as of end-June 2020, against CNY20.7 billion in short-term debt. It issued USD500 million in 7% senior notes due 2025 in October 2020 and redeemed USD500 million in 8.75% senior notes due 2021. It also issued USD350 million in 6% senior notes due 2026 in January 2021.
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
DATE OF RELEVANT COMMITTEE
29 January 2021
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.
RATING ACTIONSENTITY/DEBT RATING
China SCE Group Holdings Limited
senior unsecured
LT BB- New Rating
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Additional information is available on www.fitchratings.com
CHINA SCE GROUP HOLDINGS LIMITED 
