Fitch Ratings has upgraded China-based homebuilder Jiayuan International Group Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B+' from 'B'.

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 Yangtze River Delta and high profitability. The ratings are constrained by the company's smaller scale than higher-rated peers.

Key Rating Drivers

Leverage Improves: We expect leverage, measured by net debt/adjusted inventory for the combined Jiayuan and its sister company Jiayuan Chuangsheng Holding Group Co., Ltd. to stay within 40%-45% over the next two years, based on our forecast of 30%-35% leverage for Jiayuan and expectation of stable leverage for Jiayuan Chuangsheng. According to management, both companies will stick to the guidance of spending no higher than 40% of sales on land acquisitions and try to remain within the authorities' 'three red lines', or thresholds for leverage and liquidity measures.

Sister Company's Credit Profile: Fitch considers Jiayuan Chuangsheng's credit profile and assesses the combined leverage to reflect continued large related-party transactions between the two, as well as Jiayuan Chuangsheng's weaker financial profile and liquidity than Jiayuan. Jiayuan Chuangsheng's leverage of 45%-55% over the past two years was higher than Jiayuan's 30%-35%. Jiayuan Chuangsheng's liquidity, measured by available cash to short-term debt, only improved to above 1x from end-2020 while Jiayuan's ratio remained above 1x.

Related-Party Land Acquisitions: Jiayuan completed the acquisition of four Shandong projects from its largest shareholder, Mr Shum Tin Ching, in June 2021 for CNY6.1 billion, of which 15% was settled in cash and the rest in equity and convertible bonds that can be converted only to equity.

Jiayuan also acquired property projects from related parties at a total enterprise value of CNY5.5 billion, accounting for 13% and 59% of Jiayuan's land acquisitions in 2018 and 2019 by value, respectively. Fitch generally considers large related-party transactions as credit constraints, although Jiayuan's risks are mitigated by the Hong Kong Exchange's rules governing such transactions.

Focus in Yangtze River Delta: Jiayuan has operated for more than 20 years in the Yangtze River Delta (YRD), especially in Jiangsu. The injection of development projects in 2018-2021 previously held by Jiayuan Chuangsheng accelerated Jiayuan's expansion into Shanghai, and the Anhui and Shandong provinces. Jiayuan also expanded into Tier 2 and 3 cities in southern and western China from 2016. Fitch expects the YRD to continue to make up the majority of sales in the next one to two years, as nearly half of its land bank at end-1H21 was in the region, where demand remains robust.

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 CNY2,462 per sqm at end-1H21, around 20% of the average selling price of its contracted sales of CNY12,000/sq m. According to management, unrecognised contracted sales amounted to CNY37.5 billion at end-1H21 and have an average gross profit margin of 30%; new land acquired in 1H21 had lower, but still healthy, gross profit margin of around 25%.

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 Shandong projects, of CNY30 billion-35 billion are at the low end for 'B+' rated peers and substantially lower than 'BB-' peers' more than CNY55 billion. Fitch expects Jiayuan's sales to be supported by robust demand in Tier 2-3 and satellite cities in the YRD and Qingdao in the next two years. However, sales growth will slow as it expands in lower-tier cities and less-developed regions, where housing demand is less resilient. Land bank outside the YRD made up more than 40% of the total at end-2020, from nil at end-2016.

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 CNY30 billion-35 billion are at the lower end of 'B+' peers, which have sales of CNY40 billion-60 billion, except for Hopson Development Holdings Limited's (B+/Stable) CNY30 billion, Fantasia Holdings Group Co., Limited's (B+/Negative) CNY35 billion and Redco Properties Group Ltd's (B+/Stable) CNY20 billion-25 billion.

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 (HKD28 billion at end-Oct2020), which we view as negative for its credit profile, given potential volatility and the company's limited record in such investments.

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' CNY15 billion-20 billion, except for Kaisa Group Holdings Limited, which had attributable sales of over CNY100 billion. Kaisa's rating is mainly constrained by its high leverage of more than 55% and high reliance on offshore capital, with around 60% of total debt from offshore notes.

Compared with peers rated at 'B', Jiayuan has higher churn and margins. Jiayuan's combined leverage is lower than China South City Holdings Limited's (B/Negative) 45%-50% and Beijing Hongkun Weiye Real Estate Development Co., Ltd.'s (B/Negative) above 50%. Jiayuan's liquidity profile is also stronger than the other two developers, which had available cash/short-term debt of 0.4x at end-2020.

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 CNY200 million and low rental yield of 3%.

Advance rate of 60% applied to excess cash, which is defined as available cash (CNY10.5 billion at end-1H21) after deducting three months of contracted sales of around CNY8 billion.

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, China falls into Group D of creditor friendliness, and instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR and Recovery Rating of 'RR4'.

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 '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: Jiayuan had CNY10.5 billion in unrestricted cash as of end-1H21, which is sufficient to cover CN8.1 billion of short-term debt. The company has USD246.9 million of notes turning puttable in October 2021 and USD235.4 million of notes turning puttable or due in 1H22. Management said that investors holding USD100 million of the notes turning puttable in October have agreed not to exercise their options, and the company will repay the remainder of the notes with its available cash of USD122 million offshore and potential new issuance. Jiayuan has offshore note issuance quota of USD260 million. The company's overall cost for new borrowings fell to 8.75% in 1H21 from 9.5% in 2020.

Issuer Profile

Jiayuan is a small- to mid-sized property developer focusing on China's Tier 2 and 3 cities as well as satellite cities in the YRD. The company was listed on the Hong Kong Stock Exchange in 2016.

Summary of Financial Adjustments

Fitch's calculation of CNY44.7 billion of adjusted inventory used in the leverage calculation at end-1H21 mainly includes: CNY50.9 billion of inventory, CNY778 million of deposits paid for acquisitions, CNY1.3 billion of deposits paid for acquisitions of land-use rights, CNY1.6 billion of prepaid land cost, CNY84 million of property, plant and equipment, CNY5.1 billion of investment properties, CNY600 million of restricted cash pledged for acquisition of land-use rights, CNY1 billion of regulated pre-sale proceeds, CNY255 million of consideration payable for acquisition of subsidiaries, CNY227 million of other consideration payables, CNY20.9 billion of pre-sale deposits received, CNY6.7 billion of investments accounted for using the equity method, CNY1.5 billion of advances due from JV and associates, CNY3 billion of advances due to JV and associates, CNY1.3 billion of advances to NCI, and CNY1.7 billion of advances from NCI.

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	LT IDR	B+ 	Upgrade		B

senior unsecured

	LT	B+ 	Upgrade	RR4	B

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