Fitch Ratings has affirmed China-based homebuilder China Jinmao Holdings Group Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-'.

The Outlook is Stable. Fitch has also affirmed Jinmao's senior unsecured rating at 'BBB-'.

Jinmao is rated one notch above its Standalone Credit Profile (SCP) under the 'strong parent, weak subsidiary' approach in our Parent and Subsidiary Linkage Rating Criteria. Jinmao is 36.4%-owned by state-owned Sinochem Hong Kong (Group) Company Limited (Sinochem HK, A/Stable) as of end-2022.

Jinmao's SCP is supported by its strong market position, sufficient and quality land bank, stable leverage and robust financial flexibility amid industry distress. Fitch also believes Jinmao can maintain stable funding costs despite its relatively significant offshore debt exposure, in light of its solid banking relationships. It has also refinanced some of its offshore bonds with cheaper onshore bonds in recent months.

Key Rating Drivers

Sales Ahead of Industry: Jinmao's total sales, including primary land sales, fell by 34% to CNY155 billion, less than the average 40%-50% drop for most of its top 30 developer peers in the industry. We believe Jinmao's sales will continue to outperform the industry in 2023, driven by its solid reputation and quality land bank. About 80% of Jinmao's land bank is located in Tier 1 and 2 cities, where demand and supply are better balanced.

Uninterrupted Funding Access: Fitch estimates that Jinmao issued CNY22 billion of onshore bonds and USD350 million of offshore bonds, against a full-year bond maturity of around CNY22 billion in 2022. It also issued CNY3.75 billion of onshore bonds so far this year at a coupon rate of below 4%. We believe Jinmao's strong financial flexibility will continue to be supported by its strong business profile and state-owned enterprise background.

Offshore Debt to Drop: The company aims to pay down some of its offshore debt in the near-to-medium term. We estimate that CNY54 billion, or 41%, of Jinmao's total borrowings were offshore debts at end-1H22, including all perpetual bonds outstanding. The offshore debt consisted of CNY22.7 billion of fixed-rate capital market instruments and CNY31 billion of floating-rate loans. Jinmao redeemed USD1.7 billion of offshore bonds and perpetuals between 2022 and 2M23, and issued only USD350 million in bonds in March 2022.

Stable Funding Cost: We believe Jinmao's funding costs will remain stable despite its sizeable offshore debt exposure. The management said its loan costs are relatively stable despite rate changes. Fitch estimates that Jinmao's floating loan cost rose by only 30bp to 1.9% in 1H22 from end-2021, against a 150bp base rate increase during the period. We believe Jinmao may increase its reliance on onshore funding channels to help contain the rise in funding cost. The management believes it can maintain a 4% average funding cost in 2022, compared to 3.8% in 1H22.

Stable Leverage: Fitch expects Jinmao to maintain stable leverage - measured by net debt (including asset-backed securities)/net property development assets - of below 45% in 2022-2023. We estimate that leverage remained flat at 43% in 1H22, from 44% in 2021, after asset-backed securities adjustment. It spent an attributable CNY15.4 billion on land acquisitions during January-August 2022, or around 30% of attributable sales collection. We believe Jinmao has operational flexibility in land replenishment, given its land-bank life of four to five years, longer than the two-year industry average.

Continued Margin Pressure: We expect Jinmao's margins to remain under pressure in 2022-2023. Its secondary development property gross profit margin was 14% in 2021 and 13% in 1H22, mainly due to gradual booking of high-cost land in 2016 and 2017. We expect margins to improve after 2023, as management estimates projects acquired over the past two years have a gross profit margin of 20%.

Uplift from Parent: Jinmao's IDR benefits from a one-notch uplift from parental support. We assess the linkage factors of legal incentive as 'Medium', given the cross-default provisions in the parent's offshore bond terms; strategic incentive as 'Low', as we regard the parent's chemical, energy and agriculture businesses as being more important to Jinmao's property development business; and operational incentive as 'Moderate', as Jinmao is integral to the parent's operations. Analytical overlays were applied.

Derivation Summary

Jinmao's attributable sales scale of around CNY80 billion, by Fitch's estimates, is larger than the CNY50 billion of Beijing Capital Development Holding (Group) Co., Ltd. (BCDH, BBB/Stable, SCP: bb) in 2022. Jinmao is a recognised national company with about half of its land bank in the Yangtze River Delta region, while BCDH is more concentrated in north China and the Pan-Bohai Rim. Both companies have quality land banks in Tier 1 and 2 cities. About 80% of Jinmao's land bank is in Tier 1 and 2 cities, and 50% of BCDH's saleable resources are in Beijing.

Jinmao's leverage of around 45% in 2021 and 1H22 is lower than BCDH's reported 53% in 2021. BCDH has large off-balance-sheet assets, but its adjusted leverage of 45%-50% is still higher than that of Jinmao. BCDH's funding of 4.7% is also higher than Jinmao's 4%, indicating slightly weaker financial flexibility. BCDH's offshore funding channel is relatively limited, with only one bond issued in July 2021, while 40% of Jinmao's total debt is offshore.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Total development-property contracted sales to increase by 5% in 2023E and stay flat in 2024 (2022: -28%);

Attributable land-acquisition outflow to account for 25% attributable cash collection in 2022E and 45% in 2023E (1H22: 14%);

Gross profit margin for development-property contracted sales at 14% in 2022E and 15% in 2023E. (1H22: 13%); total gross profit margin at 19% in 2022E-2023E (1H22: 21.7%).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Significant increase in attributable contracted-sales scale, in line with peers with higher SCPs, while maintaining leverage, measured by net debt/net property assets, below 40%;

Stronger linkage with the parent.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Leverage, measured by net debt/net property assets, sustained above 45%;

Weakening linkage with the parent.

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

Adequate Liquidity: Jinmao had total cash and cash equivalents of CNY42.3 billion at end-1H22, including a restricted portion of CNY9.4 billion. Readily available cash of CNY32.9 billion was sufficient to cover reported short-term debt of CNY28 billion. We expect the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations over the next two years, given its diversified funding channels from onshore and offshore capital markets, long-term relationships with onshore and offshore banks, and flexible land-acquisition strategy.

Issuer Profile

Jinmao is a mid-sized, multi-regional property developer in China. It was a first mover in acquiring city operation projects, which are large in scale and require experience in district planning, primary and secondary development, and operation of industrial parks and commercial properties. Jinmao listed its 67.3%-owned property management subsidiary, Jinmao Property Services Co., Limited, in 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.

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

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