Fitch Rates Skyfame's USD Senior Notes Final 'B-'

Skyfame Realty (Holdings)

05/07/2019 05:13

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Shanghai-July 05: Fitch Ratings has assigned China-based 
homebuilder Skyfame Realty (Holdings) Limited's (B-/Stable) USD105 million 13% 
senior notes due 2022 a final 'B-' rating with a Recovery Rating of 'RR4'. 

The notes are rated at the same level as Skyfame's senior unsecured rating as 
they represent its unconditional and irrevocable obligations. The assignment of 
the final rating follows the receipt of documents conforming to information 
already received and is in line with the expected rating assigned on 28 June 
2019. 

Skyfame's ratings are constrained by its scale, which is smaller than that of 
rated peers, and high leverage of close to 46% at end-2018 following its 
acquisition of a large project in Chongqing, China. Its ratings are supported by 
a growing EBITDA margin because of low land costs. We expect leverage to 
gradually drop from 2020 given sufficient land bank to support business growth 
for the next two years.

KEY RATING DRIVERS

Scale Smaller than Peers': Skyfame's rating is constrained by its 
contracted-sales scale. The company had contracted sales of CNY9.4 billion in 
2018 (2017: CNY5.8 billion), smaller than most of its 'B' rated peers' of CNY20 
billion-30 billion and 'B-' rated peers' of CNY10 billion-20 billion. Fitch 
expects Skyfame's contracted sales to expand to CNY12 billion-16 billion in 
2019-2020. In addition, Skyfame has fewer than 10 projects under development. 
However, its ability to significantly reduce project concentration by securing 
more land is limited by its tendency to acquire large land plots and its higher 
leverage in 2018, which puts the company under pressure to generate sales to 
meet financial obligations.

Leverage to Remain High: Fitch expects Skyfame's leverage, measured by net 
debt/adjusted inventory, to remain at 45%-55% in the next two to three years as 
we estimate Skyfame will have to spend about 60% on land acquisitions in the 
next one to two years. This expectation is based on Skyfame's target of 20%-30% 
annual growth in contracted sales and a land bank life sufficient for four to 
five years of development (end-2018: land bank life of six years). 

The company's leverage rose to 46% at end-2018, from a net cash position in 2017 
and 28% in 2016, as it accelerated land acquisitions and construction. The 
company spent CNY5.7 billion, or 61% of contracted sales, on buying land in 
2018. The land-acquisition-to-contracted-sales ratio was 49% in 2017. 
Construction new starts accelerated to 2.5 million square metres (sq m) in 2018, 
from 0.6 million sq m in 2017. 

EBITDA Margin to Improve: Fitch expects Skyfame's EBITDA margin, excluding 
capitalised interest from cost of sales, to remain above 25% in 2019-2020. The 
company's EBITDA margin improved to 30% in 2018, from 22% in 2017 and 15% in 
2016. This was partly due to revenue increasing faster than sales, general and 
administrative expenses and the recognition of more projects with high gross 
margins, such as Skyfame Byland in Guangzhou (an old-town redevelopment project 
with gross margins of 56%-59%). The company has unrecognised contracted sales of 
CNY8.6 billion, which carry a gross profit margin of about 30%, similar to the 
recognised gross profit margin of 31% in 2018. 

Low Land Bank Costs: Skyfame's average land cost was low at below CNY3,000 per 
sq m in 2018. Land bank cost accounted for only 27% of the cost of goods sold on 
average in 2014-2018, and we expect this to remain below 40% in the next few 
years. The company keeps land costs low by avoiding auctions and choosing to 
acquire sites through M&A, old town redevelopments and preferential auctions, in 
which respective local governments invite developers to offer bids to develop 
land. Skyfame has been the preferred bidder for several plots of land, given its 
focus on developing youth-entrepreneurship communities.

Increasing Scale, Sufficient Land Bank: Fitch expects Skyfame to increase its 
land bank to 6 million-7 million sq m in 2019-2020, from 5.9 million sq m in 
2018. As of end-2018, 6% of its unsold gross floor area was in tier 1 cities, 
while 81% was in tier 2 cities. Skyfame is shifting its land bank from the Pearl 
River Delta towards Yangtze River Delta and western China. It may also have 
access to another 19.5 million sq m of land, most of which is in old urban areas 
that are planned for redevelopment in the next 10 years. For some of these 
sites, Skyfame has signed preliminary agreements with local governments to 
acquire the land, which needs to undergo primary development prior to auction. 

DERIVATION SUMMARY

Compared with Sunshine 100 China Holdings Ltd (CCC+), Skyfame has better land 
bank quality, with more than 75% of land in tier 1 and 2 cities. This makes 
Skyfame's contracted sales more predictable compared with that of Sunshine 100. 
Skyfame's churn rate is more than double that of Sunshine 100, while the two 
entities' EBITDA margins are similar. As a result, Skyfame is rated one notch 
higher than Sunshine 100. 

Both Skyfame and Oceanwide Holdings Co. Ltd. (B-/Stable) had EBITDA margins of 
about 30% in 2018, but Oceanwide had higher contracted sales of about CNY17 
billion and slightly higher recurring EBITDA-to-gross interest coverage. At the 
same time, Oceanwide's leverage of 70%-80% is higher than Skyfame's 46%. The two 
companies are rated at the same level.   

Xinhu Zhongbao Co., Ltd.'s (B-/Stable) contracted sales were double that of 
Skyfame's in 2018. However, Xinhu Zhongbao's ratings are constrained by Fitch's 
expectation that leverage will remain high at 70%-80% in 2019-2020 after 
reaching 73% at end-2018. In comparison, Fitch expects Skyfame's leverage to be 
45%-55%. Fitch rates the two companies at the same level.

KEY ASSUMPTIONS

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

- Contracted sales of CNY12 billion-16 billion in 2019-2020 (2018: CNY9.4 
billion)

- 60% of contracted sales proceeds to be spent on land replenishment to maintain 
a land bank sufficient for four to five years of development

- EBITDA margin, excluding capitalised interest from cost of sales, at 28% in 
2019-2020 (2018: 30%)

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating 
Action

- No positive rating action is expected in the next two years unless Skyfame's 
business profile significantly improves

Developments that May, Individually or Collectively, Lead to Negative Rating 
Action

- Contracted sales fail to reach Fitch's forecast of CNY12 billion in 2019

- Leverage, measured by net debt/adjusted inventory, sustained at above 65%

- EBITDA margin, excluding capitalised interest from cost of sales, sustained at 
below 20%

- Weakening of Skyfame's liquidity position

LIQUIDITY

Adequate Liquidity: As of end-2018, Skyfame had a cash balance of CNY3.1 billion 
(including a restricted cash balance of CNY0.7 billion), sufficient to cover 
debt maturing in one year of CNY2.8 billion. The company had another CNY1.6 
billion of undrawn credit facilities.

Contact: 

Primary Analyst

Jackson Hui

Associate Director

+852 2263 9993

Fitch (Hong Kong) Limited

19/F Man Yee Building

60-68 Des Voeux Road Central 

Hong Kong

Secondary Analyst

Laura Long

Associate Director

+86 21 6898 7989

Committee Chairperson

Su Aik Lim

Senior Director

+852 2263 9914

Date of Relevant Committee: 12 June 2019

Summary of Financial Statement Adjustments: Capitalised interest is adjusted for 
cost of goods sold, as disclosed by the issuer.

Media Relations: Yee Man Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10081401

Solicitation Status 

https://www.fitchratings.com/site/pr/10081401#solicitation

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https://www.fitchratings.com/regulatory

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