Times China Holdings Upgraded To 'BB-' On Improved Leverage Driven By Stronger Sales; Outlook Stable

  • We expect Times China Holdings Ltd. to maintain its significantly improved leverage over the next two years because the company's good execution and positioning should lead to sustainably strong revenue and EBITDA growth.
  • The China-based developer's business position should also continue to improve, partly due to its urban renewal projects, which should help the company to achieve a bigger scale and support its margin despite market volatility.
  • On March 15, 2019, S&P Global Ratings raised its long-term issuer credit rating on Times China to 'BB-' from 'B+'. We also raised the long-term issue rating on the company's outstanding senior unsecured notes to 'B+' from 'B'.
  • The stable outlook reflects our expectation that Times China will balance sales growth with steady land acquisitions over the next 12 months.
HONG KONG (S&P Global Ratings) March 15, 2019--S&P Global Ratings today took 
the rating actions listed above. We raised the rating to reflect our view that 
Times China's continuing revenue growth and controlled land acquisitions will 
help it to sustain its improved leverage over the next two years. We expect 
the company's ratio of debt to EBITDA to be 4.3x-4.8x in 2019-2020, after a 
significant improvement to 4.0x in 2018, from 5.3x in June 2018. In our view, 
Times China's expertise in the Greater Bay Area and good execution are bearing 
fruit. The company had strong revenue growth of 48% and gross margin of 30.9% 
in 2018, compared with 42.6% growth and 28% gross margin in 2017.

The upgrade also reflects improvements in Times China's business profile, 
including the accelerated conversion of urban renewal projects. While the 
company's operations remain concentrated in the Greater Bay Area, we believe 
its strong position in the development of the region supports future growth. 
Meanwhile, we see a gradual increase in diversification as Times China expands 
to more cities. Although 98% of the company's acquired land in 2018 was in 
Guangdong province, it started to seek opportunities in other provincial 
capitals such as Chengdu, Shanghai, and Wuhan.

Times China has a record of consistent financial management. It maintained 
stable leverage while pursuing strong growth in 2015-2017. In addition, the 
company controlled its land acquisitions in 2018 amid a cool down in the 
property market. Times China's land acquisition cost in 2018 was Chinese 
renminbi (RMB) 15 billion, only 25% of its contracted sales and 35% of cash 
proceeds from sales during the year. As a result, its debt-to-EBITDA ratio 
fell significantly to 4.0x, from 5.3x in June 2018. 

We expect Times China to maintain its financial position over the next two 
years despite likely slower growth in contracted sales in 2019 and 2020, from 
a high of 40%-50% annual growth in 2016-2018. We estimate the company's 
contracted sales will rise by 20%-25% in 2019, considering its enlarged 
saleable resources of around RMB130 billion and a sale-through ratio of 
55%-60%. We also expect Times China to closely tie its land acquisitions 
budget with cash sales proceeds to control debt growth.

Times China's conversion of urban renewal projects could strengthen its land 
bank quality and sales pipeline, in our view. Low-cost land from these 
projects should provide the company good land replenishment opportunities and 
better pricing flexibility, enhancing its margins amid market volatility. 
Times China stepped into this segment before its listing in 2013, but 
successful conversions were limited until an acceleration in 2018. The company 
added about 719,600 square meter (sqm) to its land bank in 2018 and generated 
RMB2.78 billion of revenue during the year from profit sharing of land sales 
from these projects. In 2019, Times China has already converted projects in 
Guangzhou and Jiangmen, with a gross floor area of about 600,000 sqm. We 
estimate conversion of 1 million-2 million sqm annually in the next two years, 
which will either enhance its land bank or boost revenues.

However, urban renewal projects have less visibility on timing and the impact 
on earnings, in our view. In addition, a significant volume ramp-up may incur 
expenditure related to resettlement or result in more land premium payments if 
Times China opts to buy the land from these projects.

The stable outlook reflects our view that Times China's leverage will 
stabilize at around 4.5x over the next 12 months. Strong EBITDA growth should 
partially offset debt growth and a moderate decline in margins from a peak.

We may lower the rating if Times China's debt-to-EBITDA ratio exceeds 5x. This 
could happen if: (1) the company's debt-funded expansion is more aggressive 
than we expect; or (2) its profitability substantially declines, possibly 
because of rising land costs and increasing competition.

We may raise the rating if Times China's debt-to-EBITDA ratio is sustainably 
below 4x. This could happen if the company achieves strong revenue growth 
because of good contracted sales, and it remains disciplined in land 
acquisitions and debt growth.
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