Fitch Ratings has upgraded
The Outlook is Stable. Fitch has also upgraded Jiayuan's senior unsecured rating, senior unsecured notes and convertible bonds to 'B+' from 'B', with a Recovery Rating of 'RR4'.
The upgrade follows Jiayuan's deleveraging and expansion via organic growth and asset acquisitions from its largest shareholder. The company's reliance on trust and other loans also reduced to 13% of total debt by end-1H21 from 24% at end-2020. In addition, Jiayuan's ratings are supported by its strong presence in the
Key Rating Drivers
Leverage Improves: We expect leverage, measured by net debt/adjusted inventory for the combined Jiayuan and its sister company
Related-Party Land Acquisitions: Jiayuan completed the acquisition of four
Jiayuan also acquired property projects from related parties at a total enterprise value of
Focus in
Strong Profitability: Jiayuan's EBITDA margin (excluding capitalised interest) has been high at above 30% due to its penetration in the YRD and the cheap land acquired many years ago. Its average land cost was low at
We expect Jiayuan's gross profit margin to decrease over the next two years but to a lesser extent than most peers, given its sufficient low-cost land bank, which can support at least 3.5 years of sales. Overall gross profit margin remained strong at 32% in 1H21 and we estimate EBITDA margin (excluding capitalised interest) at 37% in 1H21 (same as in 2020). Profitability is the key criteria for Jiayuan's land acquisitions.
Scale Constrains Rating: Jiayuan's annual attributable sales, including the
Derivation Summary
Jiayuan's business and financial profile is comparable with that of Chinese property developers rated at 'B+'. Jiayuan's attributable contracted sales of
However, Jiayuan's EBITDA margin (excluding capitalised interest) of 30%-35% is wider than most 'B+' peers' 20%-30%. Furthermore, Jiayuan did not sacrifice sales churn to achieve the stronger profitability, with its contracted sales/total debt of 1.3x-1.4x above the average of 'B+' peers. The company's reliance on JV and non-controlling interest (NCI) is also at the lower end of 'B+' peers. Jiayuan's combined leverage of 40%-45% is also comparable with peers' 40%-50%.
Jiayuan and Hopson have similar attributable sales scale. Hopson adopts a slow-churn high-margin strategy, with sales churn at only 0.3x-04x but EBITDA margin at around 45%. Hopson's leverage of over 45% is slightly higher than Jiayuan's combined 40%-45%. Both companies have robust financial transparency and sufficient liquidity. Hopson has very large land bank reserve that can support around 10 years of future sales. However, it has large investment in private and listed equities (
Redco's margin and churn are weaker than those of Jiayuan, but Redco's leverage was low at below 30% before 2020 and we expect leverage to stay healthy at around 35% in the future. We think Jiayuan's stronger business profile but higher leverage (combined) justifies the same rating with Redco.
Jiayuan's scale is much larger than most 'B' rated peers'
Compared with peers rated at 'B', Jiayuan has higher churn and margins. Jiayuan's combined leverage is lower than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Attributable sales to increase by 10% in 2021 and 3% per year thereafter;
Cash collection rate at 75% in 2021 given tighter mortgage policies in 2H21, and recover to 78% thereafter as sales growth slows;
Land premium to represent around 40% of sales in 2021- 2022, as guided by management;
Construction expenditure to represent 40% of sales receipts during 2021-2022;
Average funding cost of 9% during 2021-2022.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Jiayuan would be liquidated in bankruptcy because it is an asset-trading company.
We have assumed a 10% administrative claim.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
The 80% advance rate applied to adjusted inventory is supported by Jiayuan's high profit products, which generate an EBITDA margin of above 30%.
Advance rate of 70% applied to trade receivables.
Advance rate of 60% applied to property, plant and equipment, which are buildings.
Advance rate of 40% applied to investment property portfolio, considering the limited rental income of around
Advance rate of 60% applied to excess cash, which is defined as available cash (
The allocation of value in the liability waterfall results in recovery corresponding to a Recovery Rating of 'RR1' for the senior unsecured debt. However, the Recovery Rating for senior unsecured debt is capped at 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action will only be considered when attributable contracted sales expand to a level that is comparable with that of 'BB-' peers on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Combined leverage, as measured by net debt/ net property assets, of Jiayuan and Jiayuan Chuangsheng sustained above 55%
Cash interest paid/ implied cash collection sustained above 15% (1H21: 11%)
Significant deterioration in liquidity or funding access
Sign of weaker corporate governance practices
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: Jiayuan had
Issuer Profile
Jiayuan is a small- to mid-sized property developer focusing on
Summary of Financial Adjustments
Fitch's calculation of
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
Jiayuan has an ESG Relevance Score of '4' for Group Structure due to large related-party transactions. Although the company settled related-party transactions mainly with non-cash payments and they appear fairly valued, there is potential for more such transactions. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Jiayuan has an ESG Relevance Score of '4' for Governance Structure due to its concentrated shareholding. The largest shareholder owns 74.93% of the company, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
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 RECOVERY PRIOR
Jiayuan International Group Limited LTIDR B + Upgrade B
senior unsecured
LT B+ Upgrade RR4 B
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