Sunac China Holdings Ltd. Outlook Revised To Stable From #B+# Rating Affirmed

Stocks and Financial Services Press Releases Thursday April 12, 2018 18:21
HONG KONG--12 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 12, 2018--S&P Global Ratings revised its rating outlook on China-based property developer Sunac China Holdings Ltd. to stable from negative. We also affirmed our 'B+' long-term issuer credit rating on Sunac and the 'B' long-term issue rating on the company's outstanding senior unsecured notes.

We revised the outlook because we expect Sunac's leverage to improve in 2018 on the back of strong contracted sales, stable margins, and a reduced appetite for debt-funded acquisitions.

We estimate that Sunac's see-through debt-to-EBITDA ratio, including the attributable non-consolidated financials of joint ventures (JVs) and associates, improved to 15x in 2017, from about 19x in 2016. We anticipate that the ratio will improve further to about 10x in 2018 based on our expectation of strong earnings growth and more controlled expansion. However, the company's still-high leverage and uncertainty over its acquisitions continue to constrain the rating.

We believe that Sunac's land acquisition spending will stabilize at about Chinese renminbi (RMB) 100 billion each year in 2018 and 2019, compared with RMB116.2 billion in 2017. The company's land acquisitions fell to RMB7.9 billion in the first quarter of 2018, from a pro rata amount of around RMB30 billion in the previous year. This is possible because Sunac has large land reserves of 147 million square meters and an additional 71 million square meters in urban redevelopment projects that the company hasn't acquired the land use rights. We estimate this is sufficient to support sales growth over the next five years.

Sunac's earnings are likely to increase significantly in 2018 following the company's rapid growth in sales over the past two years. The company's sizable sold-but-not-yet-recognized sales of about RMB170 billion (excluding the amount from unconsolidated JVs and associates) and increased project completion should support topline expansion.

We also expect Sunac's EBITDA margin to stabilize at 20%-22% in 2018. Our estimate considers robust demand for Sunac's properties, the company's large land reserves acquired at a reasonable cost, and the Chinese government's measures to cool property prices in higher-tier cities where Sunac operates. However, the company may face higher operating expenses to support satisfactory sales execution.

We continue to view Sunac's opportunistic investments as an event risk and a key rating constraint. The company's investment in non-related businesses, such as in Leshi in 2017, demonstrates its aggressive and unpredictable nature. Sunac's acquisition of the 13 cultural and tourism projects from Dalian Wanda Commercial Properties Ltd. in 2017 for RMB44 billion also led to a significant increase in debt. Our negative assessment of Sunac's financial policy reflects uncertainties over potential acquisitions beyond our base case. In our base case, we assume a spending of RMB20 billion for potential non-core acquisitions.

The stable outlook reflects our view that Sunac's debt-funded acquisitions will moderate over the next 12 months, but its leverage will continue to remain high. We expect Sunac to maintain its strong sales execution and current margins over the period.

We could lower the rating if Sunac pursues debt-funded acquisitions beyond our expectation such that its see-through debt-to-EBITDA ratio does not improve to about 10x in 2018.
We could also lower the rating if Sunac's liquidity weakens significantly. This could happen if its sales performance and cash collection from sales are materially lower than our expectation.
We see limited rating upside in the coming 12 months due to Sunac's high leverage.

However, we could raise the rating if: (1) Sunac demonstrates good financial discipline and develops a solid record of prudent financial management; or (2) the company's leverage improves substantially because of strong business fundamentals. The debt-to-EBITDA ratio strengthening toward 5x would indicate such improvement.

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