Guangdong Helenbergh Estate Group Co. Ltd. Assigned #B# Rating With Stable Outlook

Stocks and Financial Services Press Releases Tuesday May 15, 2018 16:10
HONG KONG--15 May--S&P Global Ratings

HONG KONG (S&P Global Ratings) May 15, 2018--S&P Global Ratings assigned its 'B' long-term issue credit rating to China-based property developer Guangdong Helenbergh Estate Group Co. Ltd. The outlook is stable.

The rating on Helenbergh reflects the company's increasing execution risk given its fast expansion, and higher information and governance risks relative to peers due to its privately owned status. Helenbergh also has high refinancing risk, due to its large non-bank borrowings and a short debt-maturity profile. The company has comparatively narrow financing channels as a non-listed company. Nevertheless, Helenbergh's sales performance is satisfactory and its leverage has been stable over the past few years while it continued to expand its scale and to areas outside of Guangdong province. Moreover, we believe Helenbergh has sufficient low-cost and diversified land reserves for future development.

Helenbergh's project execution capabilities under an enlarged operating scale are untested. In our opinion, the company's high growth appetite and increasing pace of expansion will likely raise its execution risk. Over the past few years, Helenbergh rapidly expanded land reserves and accelerated contracted sales. Contracted sales increased to Chinese renminbi (RMB) 25 billion in 2017, more than double the RMB9.9 billion in 2014. Helenbergh targets to further accelerate its contracted sales to expand its operating scale in the next one to two years. We believe this expansion mode will strain its resources as well as financial management capabilities.

In our view, Helenbergh's large and low-cost land reserves can partly offset its increasing execution risk. As of December 2017, the company had total land reserves of 15.3 million square meters. We estimate that existing reserves are sufficient for development in the coming three to four years. A large part of these reserves are located in the suburbs of tier-two and tier-three cities since Helenbergh targets project locations that are within an hour's reach from city centers. The company has also entered into preliminary agreements to acquire about 13 million square meters of land parcels, through mergers and acquisitions or by engaging in urban redevelopment projects. Considering Helenbergh's existing reserves and sales momentum, we expect the company to maintain its spending on land acquisitions at 30%-40% of its contracted sales in each year.

We anticipate that Helenbergh's diversification benefits will gradually improve as it implements its strategy to penetrate into existing cities and expand into selected tier-two and tier-three cities. The company started its regional expansion in 2009 when it entered China's western regions. Over the years, Helenbergh has developed its footprint in some cities along the Yangtze River Delta, in the Bohai Rim, while deepening its roots in Guangdong province. The government's tightening policies in tier-one and certain overheating tier-two cities have had a spillover effect on lower-tier cities. Helenbergh has benefited from the recent market recovery, given its geographical exposure.

However, Helenbergh's product positioning targets low- to mid-priced projects, and that somewhat constrains its profitability. Despite a slight improvement in 2017, the company's EBITDA margin of 20%-24% is moderately lower than the market average. Given Helenbergh's lower price tag, the increase in input costs may be difficult to pass through to price-sensitive buyers. Due to a change in product mix and improving market sentiment in lower-tier cities, Helenbergh increased its selling price to about RMB9,770 per square meter in 2017. However, we believe the increase in selling price may be slightly offset by rising land costs, which are likely to dent the booked margin in the coming two years.

The company's refinancing risk will likely continue to be high with short-term borrowing accounting for about 42% of total gross debt. We estimate Helenbergh's debt maturity profile to be slightly less than two years as of December 2017. In our view, liquidity tightening could have a larger impact on the company than many of its rated peers, given Helenbergh's strong reliance on trust financing and borrowings from asset management companies, apart from bank borrowings. The availability and cost of these funding channels can vary significantly according to market conditions, which in recent months have been tightening under the government's initiative to control shadow banking. To mitigate the situation, Helenbergh is seeking alternative funding sources to support its ongoing development, including domestic bonds, offshore borrowings, and tapping the equity market. In December 2017, the company obtained approval to issue domestic bonds worth up to RMB4.0 billion. This could temper the refinancing risk.

In our view, Helenbergh has lower information transparency relative to its peers. Given its privately owned status, the company is not compelled to disclose any material transactions. We also believe Helenbergh faces higher key-man and governance risk, given our expectation that Mr. Chiheng Huang has substantial influence on all key decisions. Mr. Huang is the founder of Helenbergh and he assumes key roles in the management team.

The stable outlook reflects our view that Helenbergh will maintain its satisfactory sales performance and project execution in the next 12 months. We expect that the ratio of debt to EBITDA will hover at 6.0x-7.0x in the forecast period.

We could lower the rating if Helenbergh's capital structure continued to rely on short-term borrowings, such that the weighted average debt maturity is below two years, while its liquidity profile shows sources are deficient to cover uses. We could also downgrade the company if Helenbergh's leverage materially deteriorates. This could happen if (1) Helenbergh's contracted sales are materially lower than our projection of about RMB30 billion-RMB33 billion in 2018 and RMB37 billion-RMB39 billion in 2019; and (2) the company becomes more aggressive than expected towards debt-funded expansion.

We could raise the rating if: (1) Helenbergh controls its pace of expansion and lowers its debt leverage such that its ratio of debt to EBITDA consistently stays below 5x; and (2) its weighted average debt maturity is above two years and the company's ratio of liquidity sources is more than 1.2x.

We may also raise the rating if the company demonstrates a longer record of geographic and scale expansion without material deterioration in debt leverage.

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