GUANGZHOU R&F PROPERTIES CO., LTD.
Fitch Ratings has affirmed the Long-Term Foreign-Currency Issuer Default Ratings (IDR) on
Guangzhou R&F's and RFHK's senior unsecured ratings have been downgraded to 'C' with a Recovery Rating of 'RR6', from 'CC' with a Recovery Rating of 'RR4'.
The affirmation of the IDR reflects Guangzhou R&F's current capital structure with significant capital market obligations due in
The company is planning to continue asset sales to repay the upcoming maturities, but we believe there is high execution risk due to the challenging macroeconomic environment. A persistent drop in contracted sales in 2022 will weaken the company's ability to repay debt, as cash collected from contracted sales is a key source of Guangzhou R&F's liquidity.
The downgrade of senior unsecured ratings and the ratings on the two entities' outstanding US dollar notes reflects the subordination of their offshore bonds to onshore debt. Offshore debt recovery fell to 0% by end-2021 from 56% in 1H21, driven by lower unrestricted cash and weaker gross profit margin leading to higher margin-adjusted customer deposits at end-2021, according to unaudited numbers. The outstanding US dollar notes, which we consider to be the lowest-ranking debt, are too far down in priority to receive any significant payment during liquidation.
Key Rating Drivers
Significant Capital-Market Obligations: Guangzhou R&F's unrestricted cash balance is not enough to cover its capital-market maturities in 2022. The company had an unrestricted cash balance of around
Declining Contracted Sales: We believe a sustained decline in contracted sales will continue to worsen its ability to repay maturing debt. Guangzhou R&F's contracted sales fell by 56% yoy in 1Q22. Total contracted sales fell by 13% to
Limited Capital-Market Access: Guangzhou R&F's access to onshore and offshore bond markets continues to be limited. We believe the company will continue to find it challenging to access the offshore bond market. Guangzhou R&F may face difficulty extending puttable onshore bonds and repaying offshore bonds under current market conditions. The company is still able to refinance development loans.
Low Gross Profit Margin: We expect the company's gross profit margin to remain low in 2022 as Guangzhou R&F continues to try to boost sales for increased cashflow. Guangzhou R&F's overall gross profit margin fell to around 8% in 2021 from 24% in 2020. This is driven by recognition of low-margin projects that are also sold at a discount to boost sales for additional cashflow.
Uncertainty over Asset Disposals: There has been slow progress on the sale of Guangzhou R&F's investment properties and hotel operations. We think its asset disposals are subject to execution risk, increasing the uncertainty of cash inflow from these sales.
RFHK Equalised with Guangzhou R&F: RFHK's ratings are equalised with Guangzhou R&F's mainly due to medium legal linkage, medium strategic linkage and high operational linkage between Guangzhou R&F and RFHK. RFHK is fully controlled and managed by Guangzhou R&F, as it does not have its own management team. RFHK is an integral part of Guangzhou R&F and has substantial development property and investment-property operations. It holds all of GZRF's offshore projects.
ESG - Governance: Guangzhou R&F has an ESG Relevance Score of '4' for Financial Transparency. The delay in the publication of audited financial statements, close to the regulatory deadline of
Derivation Summary
Guangzhou R&F's ratings reflect its tight liquidity and a default of some kind appears probable.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Attributable contracted sales to drop by 25% and 10% in 2022 and 2023, respectively.
EBITDA margin to remain low at around 1% in 2022-2023
55%-60% of sales proceeds will be used for construction in 2022-2023
9%-10% of revenue for selling, general and administrative costs in 2022-2023
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Guangzhou R&F would be liquidated in a bankruptcy as it is an asset-trading company. The nature of homebuilding means the liquidation-value approach will always result in a much higher value than the going-concern approach.
We have assumed a 10% administrative claim
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
80% advance rate to accounts receivable, which was raised from 70%. This treatment is in line with our recovery rating criteria.
60% advance rate to investment properties, which was raised from 54%. Guangzhou R&F's investment-property portfolio mainly consists of commercial buildings in the
50% advance rate to property, plant and equipment, which was lowered from 60%, mainly consisting of hotel operations.
61% advance rate to net inventory, which was lowered from 65%. Guangzhou R&F's inventory mainly consists of completed properties held for sale, properties under development (PUD) and deposits or prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rate for net inventory.
70% advance rate to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. Guangzhou R&F has been similar to peers in recent years in terms of a gross margin at 22%-25%. As such, the advance rate of 70% was applied, which is higher than the typical 50% mentioned in the criteria.
50% advance rate to PUDs. Unlike completed projects, PUDs are more difficult to sell. These assets are also in various stages of completion. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits. The 50% advance rate is in line with recovery rating criteria.
90% advance rate to deposits or prepayments for land acquisitions. Around 51% of Guangzhou R&F's land is located in Tier 1 and Tier 2 cities in
50% advance rate to joint-venture net assets, which typically include a combination of completed units, PUDs and land bank. The 50% advance rate was applied in line with the baseline advance rate for inventories.
0% advance rate to excess cash after netting the amount of note payables and trade payables (construction fee and retention payables).
The allocation of value in the liability waterfall results in recovery corresponding to 'RR6' for the senior unsecured offshore bonds.
RATING SENSITIVITIES
For Guangzhou R&F
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Clarity on plans to address the debt maturities in 2022
Business operations remain intact and timely publication of audited financial results
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any announcement of a default or default-like process
For RFHK
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade of Guangzhou R&F's IDR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Guangzhou R&F's IDR
Weakened linkage with Guangzhou R&F
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 '
Liquidity and Debt Structure
Shortfall in Liquidity: Guangzhou R&F had an unrestricted cash balance of around
Issuer Profile
Guangzhou R&F, founded in 1994, is a developer focusing on medium- and high-end properties. The company also engages in hotel development, commercial operations, property management and architectural and engineering design.
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.
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
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
LT IDR
CC
Affirmed
CC
senior unsecured
LT
C
Downgrade
RR6
CC
LT IDR
CC
Affirmed
CC
senior unsecured
LT
C
Downgrade
RR6
CC
senior unsecured
LT
C
Downgrade
RR6
CC
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