Fitch Ratings has affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) of China South City Holdings Limited (CSC) at 'B-'.

The Outlook is Negative Outlook. Fitch has also affirmed the senior unsecured rating at 'B-', with a Recovery Rating of 'RR4'.

The affirmation reflects our view that CSC is likely to repay its offshore bonds due 2H22, mainly using proceeds from equity transactions and asset disposals. CSC successfully obtained some new back facilities, after Shenzhen SEZ Construction and Development Group Co Ltd (SZCDG), a state-owned enterprise, became its largest shareholder.

The Negative Outlook reflects CSC's weak sales and tight liquidity and its lack of sufficient funding to repay its 1H23 offshore bond maturities.

At the same time, Fitch has chosen to withdraw CSC's ratings for commercial reasons.

Key Rating Drivers

Tight Liquidity: CSC's liquidity is tight. It reported total cash of HKD4.6 billion (included restricted cash), against short-term debt of HKD20.8 billion, in the financial year ending March 2022 (FY22). However, we believe CSC will be able to refinance its bank and other loans with new bank facilities and repay its offshore bonds due 2H22 with proceeds from asset disposals and equity transactions.

New Credit Facilities: CSC obtained a new credit facility of CNY4 billion under a strategic cooperation agreement with Bank of Shanghai, after SZCDG became its largest shareholder. SZCDG completed the equity transaction to acquire a 29.28% stake in CSC in May 2022. CSC says it is able to obtain cheaper onshore bank loans with support from SZCDG.

Completed Asset Disposals: We expect CSC to repay its HKD7.8 billion offshore bonds due 2H22 using its HKD1.9 billion in proceeds from equity transactions, with the remainder coming from asset disposals. CSC recovered more than CNY2 billion in funds from the disposal of logistics projects in Xian, Zhengzhou and Hefei. It is also planning to dispose of more assets to repay the bonds.

Large Maturities: We believe the source of funding to repay CSC's offshore bond maturities in 1H23 is uncertain. CSC has HKD4.7 billion of offshore bonds maturing in 1H23 and we believe it will require more bank facilities to refinance these maturities. About half of CSC's fixed assets were pledged for borrowings at FYE22, providing room for CSC to pledge more fixed assets to obtain secured bank loans.

Declining Contracted Sales: We expect CSC's property sales to remain weak in FY23, at HKD8 billion-10 billion a year. Contracted sales declined by 27% yoy to HKD11.8 billion in FY22, similarly to the decline in China's property market in general. We expect CSC to rely on asset disposals or new bank facilities to refinance its capital market debt.

Weaker Profitability: CSC's gross profit margin declined to 29% in FY22, from 44% in FY21, following the recognition of property sales with lower average selling prices and weaker margins. We expect CSC's return efficiency to remain at a low single-digit percentage in FY23. This may improve if CSC is able to lower its leverage after repaying all its offshore bonds by FY24.

Sufficient Land bank: CSC has been prudent in managing its land acquisition outflows to maintain its moderate leverage. We do not expect CSC to acquire any new land in FY23 in view of its tight liquidity. CSC had 7.8 million square metres of unsold residential and multi-purpose properties available for sale at end-FY22, which is sufficient for the next five years.

Derivation Summary

CSC's ratings are driven by its tight liquidity. Its contracted sales scale is much smaller than that of other 'B' category peers, given its focus on development within its trade centres. The company's return efficiency is also lower than that of peers, as it has relatively high level of debt and minimal recognised EBITDA. CSC's leverage of around 50%, measured by net debt/net development property assets, is sufficient for the 'B' category rating.

Key Assumptions

Annual contracted sales of about HKD8 billion-10 billion a year in FY23 and FY24

No new land acquisitions in FY23 and FY24

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that CSC would be liquidated rather than reorganised as a going-concern, as the former would yield a substantially higher recovery value.

We assume a 10% administrative claim.

We applied an advance rate of 80% to account receivables. This treatment is in line with other Chinese developers.

We applied an advance rate of 50% to net property inventory. CSC's large inventory of non-residential properties may lower the visibility of its EBITDA margin.

We applied an advance rate of 50% to property, plant and equipment. This treatment is in line with other Chinese developers.

We applied an advance rate of 26% to the book value of investment properties. This is based on a 6% rental yield after considering the rental yields and locations of these assets.

As available cash is less than the total amount of note payables and trade payables (construction fees and retention payables), the net amount of note and trade payables are included in the liability waterfall.

The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR4' for the senior unsecured debt.

RATING SENSITIVITIES

Rating Sensitivities are not applicable, given the withdrawal of the ratings.

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

Tight Liquidity: CSC reported total cash of HKD4.6 billion against short-term debt of HKD20.8 billion as at FYE22. Fitch believes CSC will be able to roll over its HKD8.5 billion of bank and other loans due in a year and has already repaid the CNY600 million medium-term notes due in April 2022. CSC will rely on asset disposals and new onshore funding to repay its HKD12.5 billion of offshore bonds maturing in August 2022 to April 2023.

Issuer Profile

CSC develops and operates large-scale, integrated logistics and trade centres in mainland China. It began operations in 2002 and was listed on the Hong Kong Stock Exchange in September 2009. It started the first project in Shenzhen in 2003 and has since replicated the model into other tier two Chinese cities.

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

Following the withdrawal of ratings for CSC, Fitch will no longer be providing the associated ESG Relevance Scores.

RATING ACTIONS

Entity / Debt

Rating

Recovery

Prior

China South City Holdings Limited

LT IDR

B-

Affirmed

B-

LT IDR

WD

Withdrawn

B-

senior unsecured

LT

B-

Affirmed

RR4

B-

senior unsecured

LT

WD

Withdrawn

RR4

B-

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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