Fitch Ratings has affirmed China-based Hopson Development Holdings Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'.

The Outlook is Stable. Fitch has also affirmed the company's senior unsecured rating and the rating on its outstanding senior unsecured notes at 'B+' with a Recovery Rating of 'RR4'.

Hopson's ratings reflect the company's ability to generate cash flow for debt repayment, given its relatively resilient contracted sales and manageable land and construction outflows. Hopson faces limited unsecured debt maturities and has solid access to bank funding, supported by a quality asset base.

Key Rating Drivers

Resilient Sales: Hopson recorded relatively resilient sales performance in 2022, with contracted sales down 23% yoy compared to the 40%-60% declines at most private developers. Its performance in challenging industry conditions and Covid-related disruptions in some key markets supports our view that demand for Hopson's properties should remain robust. We forecast its sales to grow by 5% in 2023, compared to our forecast of a 0%-5% decline for the sector, on account of Hopson's substantial pipeline of saleable resources in Beijing, Shanghai and Guangzhou.

Sufficient FCF for Debt Repayment: We expect Hopson to generate adequate free cash flow (FCF) to address its unsecured debt maturities in December 2023 and 1H24. In our rating case, we forecast Hopson to have sufficient FCF to cover around HKD6 billion of unsecured debt (including US dollar bonds and syndicated loan) due in December 2023 to 1H24. We also note that the company has the flexibility to reduce land acquisitions if contracted sales are weaker than expected.

Limited Refinancing Pressure: Hopson's available cash balance decreased to HKD16 billion in 1H22, from HKD23 billion at end-2021, after significant debt reduction. This translates to an available cash to short-term debt ratio of 0.5x, based on HKD30 billion of short-term borrowings. However, around HKD28 billion was bank and other borrowings secured onshore, which we believe can mostly be rolled over in light of the group's solid access to onshore bank funding and high-quality asset base, including development projects in Tier 1 cities and investment properties.

Hopson has signed strategic agreements with some large state-owned Chinese banks and plans to replace maturing borrowings with more loans from these banks. It faces limited maturities for bonds and other unsecured financing. Its only outstanding unsecured borrowings are a USD237.5 million bond due on 28 December 2023, a USD300 million bond due on 18 May 2024, and a HKD1.5 billion syndicated loan due on 28 June 2024 after its USD250 million covered bonds due in January 2023 were repaid. We believe its cash on hand and FCF generation will provide sufficient liquidity to address debt maturities.

Continued Deleveraging: Hopson's net leverage, measured by net debt/net property assets, was 40% as of 1H22, and we believe it will continue to deleverage. We estimate that Hopson's gross debt - excluding margin loan on equity investments - decreased from around HKD115 billion as of end-2021 to HKD99 billion as of end-2022. In addition, we believe there are no further outstanding off-balance-sheet liabilities, following the repayment of trust loans used for land acquisitions in Beijing during 2020 to 2021.

Abundant Saleable Resources: Hopson's recent launch of two flagship projects in Guangzhou and Shanghai should provide around CNY60 billion of saleable resources in total. It expects to have around CNY100 billion of saleable resources in 2023, including the remaining inventory from its large projects in Beijing and redevelopment project launches in Guangzhou. It had a large development land bank of 21.7 million square metres (sqm) at end-June 2022, with 75% in Tier 1 cities, which is enough to support sales in the medium to long term, based on its 1.4 million sqm of contracted sales in 2022.

Flexible Land Acquisition Strategy: Hopson plans to continue focusing on land acquisition opportunities in redevelopment projects. It is making progress on several redevelopment projects in Guangzhou, some of which could launch in the next 1-2 years. It may incur land premiums but has flexibility in the speed of its progress. We expect Hopson to prioritise debt reduction over growth in the current challenging market environment.

Derivation Summary

Hopson's land bank quality and sales performance are stronger than those of Radiance Group Co., Ltd. (B+/Negative), whose contracted sales fell by 55% in 2022. Hopson is focused on Tier 1 and strong Tier 2 cities, while Radiance focuses on Tier 2 and stronger Tier 3 cities, and hence we believe Radiance would have a slower recovery in demand and sales. In addition, assets in higher-tier cities may have better institutional appetite. The divergence in sales performance justifies our differing outlooks on the two companies' ratings.

Both Hopson and Radiance face limited refinancing risk, as available cash can sufficiently cover short-term capital market debt.

Key Assumptions

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

Contracted sales of 5% in 2023 and to remain stable thereafter

Cash collection rate of 80% in 2023-2024

Land acquisitions at 15% of sales proceeds in 2023 and 20% in 2024

Construction costs at 30% of sales proceeds in 2023-2024

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that Hopson would be liquidated in bankruptcy. The liquidation value approach usually results in a much higher value than the going concern approach, given the nature of homebuilding. 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.

70% advance rate applied to net inventory. Hopson's inventory mainly consists of completed properties held for sales, properties under development (PUD) and deposits/prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.

50% advance rate applied to PUD. PUDs, which are in various stages of completion, are more difficult to sell than completed projects. The PUD balance - prior to applying the advance rate - is the net of margin-adjusted customer deposits.

80% advance rate applied to completed properties held for sale. Completed commodity-housing units are closer to readily marketable inventory, and Hopson has historically recorded a strong gross margin of over 40%. Therefore, we have applied a higher advance rate than the typical 50% in the criteria.

90% advance rate applied to deposits/prepayments for land acquisitions. Land held for development is closer to readily marketable inventory, similar to completed commodity-housing units, given that Hopson's land is well located. Therefore, we have applied a higher advance rate than the typical 50% in the criteria.

80% advance rate applied to investment properties. Hopson's investment properties portfolio mainly consists of commercial buildings located in higher-tier cities such as Beijing and Shanghai. The portfolio has an average rental yield of 5%. We have applied an 80% advance rate as it implies a 6% rental yield on the liquidation value, which we consider as reasonable.

80% advance rate applied to trade receivables. Account receivables constitute a very small percentage of total assets for Hopson, as is typical for China's homebuilding industry. We have adopted an 80% advance rate in line with the criteria.

50% advance rate applied to property, plant and equipment, which mainly consists of land and buildings, the value of which is insignificant.

0% advance rate applied to excess cash. China's homebuilding regulatory environment means that available cash, including pre-sales that are regulated as cash, is typically prioritised for project completion, including payment for trade payables. Net payables (trade payables - available cash) are included in the debt waterfall ahead of secured debt. However, we do not assume that available cash in excess of outstanding trade payables is available for other debt-servicing purposes and therefore apply an advance rate of 0%.

0% advance rate applied to net equity investments. Hopson had about HKD5 billion in listed equity investments (including its stake in Ping An Good Doctor, which is booked as an associate), with HKD1.5 billion of margin loans borrowed against it. We typically assign a 0%-40% cash credit to such investments due to their liquidity and volatility. We have applied a 0% advance rate, taking into consideration the margin loan.

The allocation of value in the liability waterfall results in a Recovery Rating of 'RR1' for the offshore senior unsecured debt. The Recovery Rating for senior unsecured debts is capped at 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings Criteria, China falls into Group D for creditor friendliness, and instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR.

RATING SENSITIVITIES

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

We do not expect positive rating action in the next 12-18 months as the scale of Hopson's contracted sales is unlikely to improve significantly.

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

No stabilisation in contracted sales or cash collection, or aggressive investments (including land banking) relative to sales performance

Deterioration in liquidity and/or funding access

Leverage, measured by net debt/net property assets, sustained above 55%

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.

Issuer Profile

Hopson is a property group that specialises in the development of medium to high-end large-scale residential properties in high-tier Chinese cities. It recorded CNY33 billion of contracted sales in 2022, down 23% yoy. Hopson had 21.7 million sqm of development land bank as of end-June 2022. It also has a portfolio of investment properties, mainly in Beijing and Shanghai, generating around HKD3 billion of annual rental income.

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

Hopson has an ESG Relevance Score of '4' for Group Structure due to uncertainty regarding the financial health of related parties and the associated risks. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

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

(C) 2023 Electronic News Publishing, source ENP Newswire