This is a correction of the release published on 29 July 2022. It includes the senior unsecured rating of Hong Seng Limited that was downgraded to 'CC' from 'B-' and removed from Rating Watch Negative (RWN), which was omitted from the original release.

Fitch Ratings has downgraded the Long-Term Issuer Default Ratings and senior unsecured ratings on China-based property developer Hong Yang Group Company Limited and its subsidiary Redsun Properties Group Limited to 'CC' from 'B-'. All ratings are removed from RWN. The Recovery Rating remains at 'RR4'.

The downgrade reflects Redsun's increasing refinancing risks, amid market reports that the company failed to make an interest payment that was due on 13 July for a bond.

The company has not provided further information to Fitch beyond its public announcements and Fitch was unable to verify the non-payment of interest.

Key Rating Drivers

Uncertain Bond Interest Payment: Redsun has not made any public statements in response to market news that the company missed an interest payment due on 13 July 2022 on its USD350 million notes that mature on 13 January 2025. The company is in the 30-day grace period for interest non-payment before an event of default is triggered, the reports say. Fitch was unable to verify the accuracy of this news.

Heightened Refinancing Risk: We believe the company may not be able to access the capital market in the short term and expect it to rely on cash on hand and internal cash flow to address upcoming maturities in 2H22 and 1H23.

Fitch estimates Hong Yang and Redsun had over CNY5 billion of available cash for debt repayment as of May 2022, including CNY0.5 billion-1 billion at Hong Yang alone (excluding Redsun and Redsun Services) and CNY4.5 billion at Redsun. This appears sufficient to cover only the group's debt maturities for the rest of 2022, but will deplete its liquidity buffer.

Weak Contracted Sales: Redsun's total contracted sales fell by 60% yoy in 6M22 to CNY19.6 billion, on the recent resurgence of Covid-19 cases in China and related lockdowns, which led to weaker housing demand and consumer confidence. Sales in June 2022 increased by 32% month-on-month to CNY4.1 billion, but we believe a broader sales recovery in 2H22 remains uncertain and Redsun's full-year contracted sales will probably decline by over 30%. The weak sales will continue to hamper the company's cash flow generation and build-up of its liquidity buffer.

Derivation Summary

Hong Yang's ratings reflect the increasing refinancing risks amid market reports about its non-payment of the bond interest.

Key Assumptions

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

Total contracted sales to decline by 36% in 2022 before increasing by 3% a year in 2023-2025;

Contracted average selling price to decrease by 15% in 2022 before recovering to low single-digit growth in 2023-2025;

Property development gross profit margin of about 16.9% in 2022-2025 (2021: 18%);

Minimal land acquisitions to prioritise debt repayment

KEY RECOVERY RATING ASSUMPTIONS

Fitch's recovery analysis assumes that Hong Yang and Redsun would be liquidated in a bankruptcy, as they are essentially asset-trading companies. The nature of homebuilding means the liquidation-value approach will almost always result in a higher value than the going-concern approach.

We assume a 10% administrative claim, in line with criteria.

Liquidation Approach

The liquidation estimate reflects our view of the value of balance-sheet assets that can be realised in a sale or liquidation process conducted during bankruptcy or insolvency proceedings and distributed to creditors.

Advance rate of 80% applied to accounts receivable. This treatment is in line with our Corporates Recovery Ratings and Instrument Ratings Criteria.

Advance rate of 58% applied to net property inventory. Redsun's inventory consists mainly of completed properties held for sale, properties under development (PUD) and deposits and prepayments for land acquisition. Different advance rates were applied to the various inventory categories to derive a blended advance rate.

Advance rate of 65% applied to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory and Redsun has a historically strong gross margin of around 20%. As such, we applied a higher advance rate than under criteria.

Advance rate of 55% applied to PUD. PUD are more difficult to sell than completed projects and are at various stages of completion. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.

Advance rate of 90% applied to deposits and prepayments for land acquisitions. Similar to completed commodity housing units, land held for development is closer to readily marketable inventory. Redsun's land is mostly located in Tier 2 and 3 in the Yangtze River Delta.

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

Advance rate of 60% applied to Redsun's investment properties. Redsun's investment property portfolio consists mainly of commercial buildings located in the Yangtze River Delta area. The portfolio has an average rental yield of 4%, in line with the industry average.

Advance rate of 100% applied to Hong Yang's investment properties, excluding Redsun, based on a high rental yield of over 10% and the location of the assets.

Advance rate of 50% applied to joint-venture net assets, which typically include a combination of completed units, PUD and land bank. The advance rate is in line with the baseline rate for inventory.

Advance rate of 0% applied to excess cash after netting the amount of note payables and trade payables (construction fee and retention payables).

The above items exclude the portion from Redsun Services Group Ltd, the listed property-management arm of Hong Yang group. The recovery value of Hong Yang's stake in Redsun Services is based on the going-concern approach.

The allocation of value in the liability waterfall results in recovery corresponding to a Recovery Rating of 'RR2' for Redsun's senior unsecured offshore bonds and 'RR1' for Hong Yang's senior unsecured bonds. However, the Recovery Rating for senior unsecured debt is capped at 'RR4', because under Fitch's Country-Specific Treatment of Recovery Ratings Criteria, China falls into Group D of creditor friendliness, and Recovery Ratings of instruments from issuers with assets in this group are subject to a cap of 'RR4'.

RATING SENSITIVITIES

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

Greater clarity on the repayment plans for capital-market maturities for the rest of 2022

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

Failure to repay capital-market maturities or bond interest falling due in 2022

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: Hong Yang and Redsun have large capital-market maturities of CNY3.4 billion in the remainder of 2022 and CNY3 billion in 1H23. We think the group's access to capital markets will probably remain limited in near term, and it will have to rely on internal cash to repay debt. This will deplete its available cash balance and reduce its liquidity buffer.

Issuer Profile

Hong Yang owns 72% of Hong Kong-listed Redsun. Hong Yang group has a property management services company Redsun Services, which was separately listed in Hong Kong in July 2020, as well as a large retail and wholesale centre for home decoration material and furniture in Nanjing, Jiangsu province. Redsun develops residential properties mainly in Jiangsu province. It also operates retail malls, offices and hotels.

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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