Fitch Ratings has assigned a 'BB+' rating to China-based homebuilder Seazen Holdings Co., Ltd.'s (SHCL, BB+/Stable) proposed US dollar green bonds.

The notes are issued by Seazen Holdings' indirect wholly owned subsidiary, New Metro Global Limited.

The proposed notes are unconditionally and irrevocably guaranteed by SHCL and rated at the same level as its senior unsecured rating because they constitute its direct and senior unsecured obligations. SHCL intends to use the net proceeds to refinance existing debt.

Fitch uses a consolidated approach to rate SHCL, which is 67% owned by its parent, Seazen Group Limited (SGL, BB+/Stable), based on our Parent and Subsidiary Linkage Rating Criteria. The ratings are supported by SGL's large attributable sales scale of CNY160 billion-180 billion in 2019-2020, comparable with that of low investment-grade peers; and Fitch's expectation that it will be able to keep its leverage below 40% after dropping to below 30% in 2019-2020.

In addition, recurring rental income from the group's shopping mall portfolio has increased. Recurring EBITDA/interest rose to 0.5x in 2020 from 0.4x in 2019, despite the coronavirus pandemic.

KEY RATING DRIVERS

Large Scale: SGL's attributable sales amounted to CNY170 billion in 2020, which declined by 6% from 2019 but was still in line with that of low investment-grade peers. SGL targets CNY260 billion of total contracted sales in 2021, or roughly flat from 2020. We expect SGL to keep sales at CNY250 billion-270 billion in 2021-2022 to support its ranking as a top-20 property developer. Attributable and consolidated sales accounted for around 70% and 60%, respectively, of the group's total sales.

Lower Leverage: Fitch expects SGL's leverage to remain below 40% as we believe it is committed to controlling leverage, despite some increase in land-acquisition and construction expenditure. SGL's leverage, including proportionate consolidation of joint ventures and associates, dropped to around 22% in 2020 and 26% in 2019, from 44% in 2018, helped by reduced land acquisition and increasing capital contribution from non-controlling interests.

SGL spent CNY83 billion on attributable land premium in 2020, which was around 55% of sales proceeds, up from CNY41 billion, or 25%, in 2019. The land acquisition has significantly slowed from 2016-2018 when SGL spent 70%-100% of sales proceeds on land each year. SGL budgeted 40%-45% of cash collection for land purchases in 2021. Fitch believes SGL has shifted its focus to maintaining a stable financial profile from aggressive expansion from 2019.

Recurring Income Supports Rating: We estimate that SGL's recurring income, mainly from Wuyue Plaza's rental and property management fees, will reach CNY8.0 billion and boost the recurring EBITDA interest coverage to 0.6x in 2021. SGL generated CNY5.3 billion of recurring income to cover 0.5x interest in 2020, even though SGL halved rents for two months in response to the pandemic, as the impact was offset by expanded leasable gross floor area. SHCL's rental revenue reached CNY1.8 billion before tax in 1Q21, almost double that in 1Q20.

Stabilised Operation: SGL's operational and financial risks, as well as its access to liquidity, did not deteriorate significantly after its former chairman was jailed in June 2020. The former chairman's son, previously a non-executive director, is now chairman of SGL and SHCL. The former chairman no longer has a role in the group, but retains a 68% stake in SGL.

Focus on Yangtze River Delta: SGL's sales contribution was mainly from the Yangtze River Delta (YRD), which generated around 55% of total contracted sales in 2019-2020. YRD accounted for 46% of SGL's land bank by gross floor area at end-2019 and 38% at end-2020. New land acquisitions in YRD still accounted for 37% of total land premium in 2019 and 50% in 2020.

Diversified and Sufficient Land Bank: SGL had total land bank of 143 million sq m at end-2020. We estimate its available-for-sale portion of 73 million sq m will support sales for two to three years. The group will continue to focus on YRD, but has been increasing its land bank outside the region to buffer against regional market uncertainty.

Margin Decline, Fast Churn: SGL's EBITDA margin (excluding capitalised interest) declined to 21% in 2020 from 31% in 2019. SGL's land costs are stable, but unit construction cost was high at around CNY4,000/sq m in 2020, which was 45% of the average selling price (ASP) recognised during the year, an increase from 34% in 2019. The lower margin was offset by SGL's successful fast-churn strategy, as measured by consolidated contracted sales/gross debt, which continued to be high at 1.4x in 2020.

DERIVATION SUMMARY

Fitch's consolidated approach to rating SGL and SHCL is based on our Parent and Subsidiary Linkage Rating Criteria due to SGL's 67% stake in SHCL. The strong strategic and operational ties are reflected by SGL representing SHCL's entire exposure to the China homebuilding business, while SGL raises offshore capital to fund the group's business expansion. The two entities share the same chairman.

SGL's quick sales-churn strategy contributed to the rapid expansion of its contracted sales to a level that is higher than that of most 'BB' category peers. SGL's total sales and attributable sales reached CNY251 billion and CNY170 billion, respectively, in 2020, higher than Logan Group Company Limited's (BB/Positive) CNY120 billion while the leverage of 22% at end-2020 is lower than Logan's 35%.

SGL has also rapidly expanded its investment properties, which generated CNY5.3 billion of recurring income and had recurring EBITDA/interest of 0.5x in 2020, a level higher than Sino-Ocean Group Holding Limited's (BBB-/Stable) 0.3x and China Jinmao Holdings Group Limited's (BBB-/Stable) 0.2x. SGL's investment-property portfolio of CNY86 billion at end-2020 was much larger than that of all 'BB' rated peers, which helps justify the one-notch difference.

Compared with investment-grade peers, SGL has a much shorter track record of maintaining a stable financial profile as it aggressively expanded and built up land bank in 2016-2018. Shimao Group Holdings Limited (BBB-/Stable) had lower leverage of below 35% in 2016-2020 while enjoying continuous growth in attributable sales to reach CNY230 billion in 2020. Shimao also had an investment-property portfolio that generates recurring income to cover 0.3x of cash interest paid.

KEY ASSUMPTIONS

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

total contracted sales of about CNY250 billion in 2021 with around 70% attributable interest.

attributable land premium represents 50% of attributable sales proceeds in 2021

attributable property development and Wuyue Plaza construction costs equivalent to 35%-40% of attributable sales collection in 2021

Investment-property revenue to reach CNY8.0 billion in 2021, with a stable gross profit margin at 68%.

Overall EBITDA margin (excluding capitalised interest) to remain above 20%

SGL maintains controlling shareholding in SHCL and no weakening in the operational ties between the two entities

RATING SENSITIVITIES

For both SGL and SHCL:

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

Net debt/adjusted inventory (after proportionate consolidation of joint ventures) sustained below 30%

Recurring EBITDA/interest paid sustained above 0.6x

Sustained neutral to positive cash flow from operations.

Longer track record of operational and financial stability comparable with that of investment-grade peers.

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

Net debt/adjusted inventory (after proportionate consolidation of joint ventures) above 40% for a sustained period

Recurring EBITDA/interest paid sustained below 0.3x

For SGL, a weakening of linkages between SGL and SHCL may lead to negative rating action.

All ratios mentioned above are based on SGL's consolidated financial data.

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

Sufficient Liquidity: SGL had an unrestricted cash balance of CNY59 billion at end-2020, sufficient to cover short-term borrowings of CNY31 billion. SHCL also had sufficient liquidity at end-March 2021, with CNY45 billion in available cash to cover around CNY30 billion in short-term debt by Fitch's estimate. The group's funding cost was flat at 6.7% in 2020 from 6.6% in 2019.

Stable Funding Access Ensures Liquidity: The arrest of the former chairman temporarily affected the group's funding access in 2H19, but it has managed to obtain financing from a large number of onshore and offshore banks since August 2019. Funding access further improved with multiple domestic and offshore issuance in 2020. The group's continued growth in contracted sales, project disposals and its decision to slow land acquisitions in 2H19 have helped maintain adequate liquidity.

The group's onshore and offshore bonds have change of control covenants, whereby the group has to make an offer to repurchase all outstanding notes if a change of control is accompanied by negative rating action, a Negative Outlook or a downgrade by an onshore rating agency for its onshore bonds or an international rating agency for its offshore bonds. The group has not breached its bond covenants since the former chairman's arrest.

ISSUER PROFILE

SGL is a property developer focused on China's Yangtze River Delta region. It ranked among the top 20 property developers by sales value in China in 2020. SGL is listed on the Hong Kong stock exchange.

SHCL is the key subsidiary of SGL that operates all of SGL's property development and investment property businesses in China. SHCL is listed on the Shanghai stock exchange.

SUMMARY OF FINANCIAL ADJUSTMENTS

Fitch's calculation of CNY220 billion in proportionately consolidated adjusted inventory at end-2020 includes CNY271 billion of properties held or under development for sale, CNY13 billion of prepayments for leasehold land, CNY1.5 billion of land-use rights and tender deposits, CNY86 billion in investment properties, CNY202 billion in contract liabilities and CNY46 billion in proportionate consolidated adjusted inventory of joint ventures and associates.

DATE OF RELEVANT COMMITTEE

03 December 2020

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 ACTIONSENTITY/DEBT	RATING

New Metro Global Limited

senior unsecured

LT	BB+ 	New Rating

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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