Fitch ratings has affirmed Central China Real Estate Limited's (CCRE) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Negative Outlook.

Fitch has also affirmed the senior unsecured rating and the ratings on CCRE's outstanding US-dollar senior unsecured notes at 'B' with a Recovery Rating of 'RR4'. Fitch has removed all ratings from Rating Watch Negative.

The affirmation and removal of the Rating Watch Negative follows CCRE's timely repayment of its USD500 million bonds maturing on 8 August 2022.

The Negative Outlook reflects tight liquidity, weak sales and large capital market debt that matures in 2023.

Key Rating Drivers

Repayment of Bond: CCRE has repaid the USD500 million bond maturing on 8 August mainly using internal cash and asset sale proceeds. We believe CCRE's liquidity position could remain tight following the bond repayment, as contracted sales declined by 55% yoy in 1H22 and will limit cash generation.

Significant Maturities in 2023: CCRE has significant offshore bonds maturing in 2023, including the USD300 million bond maturing in April and USD400 million bond maturing in August. CCRE may need to obtain additional funding to repay these bonds should its weak sales performance continue.

Share Sale Agreement: CCRE announced on 21 July that it has entered into a sale and purchase agreement to sell a 29% stake of the company to a wholly owned subsidiary of Henan Railway Construction. The sale proceeds of HKD648 million will be provided to CCRE as a shareholder loan. Fitch believes negotiation with Henan Railway Construction on the proposed issuance of convertible bonds is ongoing and on 1 August CCRE said that it had appointed two non-executive directors from Henan Railway Construction to its board.

Weak Contracted Sales: We expect CCRE's full-year 2022 contracted sales to drop by 30% to around CNY42 billion, a decline that is similar to our expectation for China's overall property market. CCRE reported 1H22 contracted sales of CNY14 billion; the 55% drop is broadly in line with private property-development peers. We believe a broader sales recovery in 2H22 remains uncertain.

Leading Position in Henan: We believe CCRE's concentration in Henan may enable the company to obtain some support from the Henan government. CCRE maintains a leading market position in the province, with a market share of about 7% by heavy-asset sales in 2021. It has been developing residential properties almost entirely in Henan for nearly 30 years and had 230 projects there at end-2021.

Adequate Land Bank: CCRE's attributable land bank of around 38.6 million square metres, which the company estimates is valued at CNY200 billion, can sustain its sales for three to four years, taking into account that some large projects may take time to churn.

Derivation Summary

CCRE's ratings and the Negative Outlook reflect its weak sales and tight liquidity.

CCRE has a weaker business profile than Radiance Group Co., Ltd. (B+/Stable), as its total contracted sales in 1H22 amounted to CNY14 billion, which was less than Radiance's CNY24 billion in the same period.

Key Assumptions

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

Total contracted sales of CNY40 billion-60 billion a year in 2022-2024

Cash collection rate at 80%-90% in 2022-2024

Gross profit margin of about 15% in 2022-2024

Annual land acquisition budget of about 10%-30% of contracted sales proceeds in 2022-2024.

Recovery Rating Assumptions:

Liquidation Approach

The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in a sale or liquidation process conducted during bankruptcy or insolvency proceedings and distributed to creditors.

Advance rate of 80% is applied to accounts receivable. This treatment is in line with our Recovery Rating criteria.

Advance rate of 57% is applied to the book value of self-owned investment properties. The portfolio has an average rental yield of 3%, which is reasonable. The implied rental yield on the liquidation value for the investment-property portfolio would improve to 6%, which we consider as acceptable in a secondary market transaction.

Advance rate of 50% is applied to property, plant and equipment, which mainly consists of buildings, the value of which is insignificant.

Advance rate of 62% is applied to net property inventory, which mainly consists of completed properties held for sales, properties under development (PUD) and prepayments for land acquisitions. Different advance rates were applied to these various inventory categories to derive the blended advance rate.

Advance rate of 70% is applied to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. The company's historical gross margin for development property is around 15% and it adopts a fast-churn strategy. This means its book value of inventory should be close to market value and we therefore applied a higher advance rate than the typical 50% mentioned in the criteria.

Advance rate of 50% is applied to PUD and prepayment for development projects. Unlike completed projects, PUD are more difficult to sell. These assets are also in various stages of completion. The PUD balance - before applying the advance rate - is net of margin-adjusted customer deposits.

Advance rate of 90% is applied to deposits for land acquisitions. Similarly to completed commodity housing units, land held for development is close to readily marketable inventory. The company is a leading developer in Henan and has good relationship with the local government. We believe it may be able to resell the land bank to the government, if needed. Therefore, we considered a higher advance rate than the typical 50% mentioned in the criteria.

Advance rate of 50% is applied to joint-venture (JV) net assets. JV assets typically include a combination of completed units, PUD and land bank. The advance rate is applied in line with the baseline advance rate for inventory.

The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR4' for the offshore senior notes.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The Outlook will be revised to Stable if the negative sensitivities are not met. This includes a sustained improvement in contracted sales, liquidity and capital structure, and greater clarity in the repayment of the offshore bonds maturing in 2023.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in liquidity or funding access

No meaning recovery in contracted sales or cash collection

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

Tight Liquidity: CCRE had unrestricted cash of CNY5.9 billion, excluding restricted cash of CNY2.7 billion, as of end-2021, while it had short-term debt of CNY3.8 billion. The company repaid the USD500 million maturity due on 8 August 2022 using internal cash and asset disposal proceeds. The company has not provided its latest cash balance to Fitch, as it is in the process of an interim review.

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

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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