Fitch Ratings has affirmed
The Outlook is Stable. Fitch has also affirmed the company's senior unsecured rating and the rating on its outstanding senior unsecured notes at 'B+' with a Recovery Rating of 'RR4'.
Hopson's ratings reflect the company's ability to generate cash flow for debt repayment, given its relatively resilient contracted sales and manageable land and construction outflows. Hopson faces limited unsecured debt maturities and has solid access to bank funding, supported by a quality asset base.
Key Rating Drivers
Resilient Sales: Hopson recorded relatively resilient sales performance in 2022, with contracted sales down 23% yoy compared to the 40%-60% declines at most private developers. Its performance in challenging industry conditions and Covid-related disruptions in some key markets supports our view that demand for Hopson's properties should remain robust. We forecast its sales to grow by 5% in 2023, compared to our forecast of a 0%-5% decline for the sector, on account of Hopson's substantial pipeline of saleable resources in
Sufficient FCF for Debt Repayment: We expect Hopson to generate adequate free cash flow (FCF) to address its unsecured debt maturities in
Limited Refinancing Pressure: Hopson's available cash balance decreased to
Hopson has signed strategic agreements with some large state-owned Chinese banks and plans to replace maturing borrowings with more loans from these banks. It faces limited maturities for bonds and other unsecured financing. Its only outstanding unsecured borrowings are a
Continued Deleveraging: Hopson's net leverage, measured by net debt/net property assets, was 40% as of 1H22, and we believe it will continue to deleverage. We estimate that Hopson's gross debt - excluding margin loan on equity investments - decreased from around
Abundant Saleable Resources: Hopson's recent launch of two flagship projects in
Flexible Land Acquisition Strategy: Hopson plans to continue focusing on land acquisition opportunities in redevelopment projects. It is making progress on several redevelopment projects in
Derivation Summary
Hopson's land bank quality and sales performance are stronger than those of
Both Hopson and Radiance face limited refinancing risk, as available cash can sufficiently cover short-term capital market debt.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Contracted sales of 5% in 2023 and to remain stable thereafter
Cash collection rate of 80% in 2023-2024
Land acquisitions at 15% of sales proceeds in 2023 and 20% in 2024
Construction costs at 30% of sales proceeds in 2023-2024
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Hopson would be liquidated in bankruptcy. The liquidation value approach usually results in a much higher value than the going concern approach, given the nature of homebuilding. 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.
70% advance rate applied to net inventory. Hopson's inventory mainly consists of completed properties held for sales, properties under development (PUD) and deposits/prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.
50% advance rate applied to PUD. PUDs, which are in various stages of completion, are more difficult to sell than completed projects. The PUD balance - prior to applying the advance rate - is the net of margin-adjusted customer deposits.
80% advance rate applied to completed properties held for sale. Completed commodity-housing units are closer to readily marketable inventory, and Hopson has historically recorded a strong gross margin of over 40%. Therefore, we have applied a higher advance rate than the typical 50% in the criteria.
90% advance rate applied to deposits/prepayments for land acquisitions. Land held for development is closer to readily marketable inventory, similar to completed commodity-housing units, given that Hopson's land is well located. Therefore, we have applied a higher advance rate than the typical 50% in the criteria.
80% advance rate applied to investment properties. Hopson's investment properties portfolio mainly consists of commercial buildings located in higher-tier cities such as
80% advance rate applied to trade receivables. Account receivables constitute a very small percentage of total assets for Hopson, as is typical for
50% advance rate applied to property, plant and equipment, which mainly consists of land and buildings, the value of which is insignificant.
0% advance rate applied to excess cash.
0% advance rate applied to net equity investments. Hopson had about
The allocation of value in the liability waterfall results in a Recovery Rating of 'RR1' for the offshore senior unsecured debt. The Recovery Rating for senior unsecured debts 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:
We do not expect positive rating action in the next 12-18 months as the scale of Hopson's contracted sales is unlikely to improve significantly.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
No stabilisation in contracted sales or cash collection, or aggressive investments (including land banking) relative to sales performance
Deterioration in liquidity and/or funding access
Leverage, measured by net debt/net property assets, sustained above 55%
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 '
Issuer Profile
Hopson is a property group that specialises in the development of medium to high-end large-scale residential properties in high-tier Chinese cities. It recorded
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
Hopson has an ESG Relevance Score of '4' for Group Structure due to uncertainty regarding the financial health of related parties and the associated risks. This has a negative impact on the credit profile, and is relevant to the ratings 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
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