LOGAN GROUP COMPANY LIMITED
Fitch Ratings has assigned
The proposed notes are rated at the same level as Logan's senior unsecured rating, as they represent its direct, unconditional, unsecured and unsubordinated obligations. Logan plans to use the proceeds from the proposed notes for refinancing purposes.
Fitch expects the company's leverage to be around 35%-40% in the next 12-18 months, and remain at this lower level because the company has sufficient land bank to support growth. Logan has shown financial discipline during its business expansion - evident in the decline in leverage - and maintained high profitability with the EBITDA margin at above 30%.
Logan has made some progress in diversification, but the majority of its land bank and contracted sales remain in the Greater
KEY RATING DRIVERS
Reduced Leverage: Logan's leverage - measured by net debt/adjusted inventory that proportionately consolidates joint ventures (JVs) and associates - fell to 33% by end-1H20, down from 35% at end-2019 (2018: 41%, 2017: 48%). The company spent
The company had a total near-term land reserve of 36.7 million square metres (sq m) at end-2019, which was sufficient for development in the next five years. Fitch expects the company to spend 40%-45% of its consolidated contracted sales on land replenishment in 2020-2021 and to maintain a land bank sufficient for four to five years of development.
Sustained High Margins: Logan's EBITDA margin, excluding capitalised interest from cost of sales, stayed high at 32% in 2019 (2018: 32%, 2017: 33%), which contributes to its deleveraging. Fitch expects the company's EBITDA margin to remain at 30%-32% in the next one to two years. Logan had unrecognised contracted sales of
High-margin primary land development income will continue to contribute to total revenue in the next three to five years, which also supports the EBITDA margin. However, we expect the high margins of this segment to decrease over time.
Growing Sales Scale: Logan's contracted sales rose by 34% to
Expansion into New Markets: Fitch believes Logan's expansion into new cities, including the
Concentration Risks Remain: Fitch expects Logan's sales from the Greater
Investment Properties' Contribution Rising: Logan's investment properties, which consist mainly of offices and shopping malls, are increasing their contribution to earnings. There are inherent execution risks in ramping up these projects, but we believe Logan will control the pace of investment, which will be covered by the sale of the residential projects. The investment property portfolio will offer significant diversification from the more-risky property development business once these projects are fully ramped-up and the portfolio achieves meaningful scale.
DERIVATION SUMMARY
Logan's contracted sales are comparable with those of 'BB' rated Chinese homebuilders, such as
Logan's leverage of 35% at end-2019 is also lower than the 40%-45% of other 'BB' rated peers, such as CIFI. Similar to Logan, CIFI's non-property development revenue generated EBITDA that covered interest by less than 0.1x in 2019. Logan continued its geographical focus on Tier 1 and Tier 2 cities, while CIFI increased its focus on Tier 2 and 3 cities in 2018-2019.
Logan has similar contracted sales compared with 'BB+' standalone rated Chinese homebuilders, such as
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Contracted sales of
EBITDA margin, with capitalised interest excluded from cost of sales, of 30%-32% in 2020-2021 (2019: 32%)
About 40%-50% of contracted sales proceeds to be spent on land acquisitions in 2020-2021 to maintain a land bank sufficient for around five years of development
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Enhancement of its market position in its core market, or material improvement in its business or geographic diversification
Leverage, as measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, sustained below 35%
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage, as measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates, sustained above 45%
EBITDA margin, excluding capitalised interests from cost of goods sold, sustained below 25%
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 '
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: Logan had total cash on hand of
DATE OF RELEVANT COMMITTEE
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
RATING ACTIONS
ENTITY/DEBT RATING
senior unsecured
LT BB New Rating
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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