Fitch Ratings has revised the Outlook on China-based homebuilder Radiance Group Co., Ltd. to Negative from Stable, and affirmed its Long-Term Issuer Default Rating (IDR) at 'B+'.

The senior unsecured rating has also been affirmed at 'B+' with a Recovery Rating of 'RR4'.

The Negative Outlook reflects risks to sales performance, together with a persistently unfavourable financing environment that could pressure the company's liquidity buffer. Sales fell by 54% in 8M22, which we expect to remain weak for the rest of the year and only likely stabilise at this lower level in 2023. The ratings are supported by adequate financial flexibility, as available cash can cover short-term capital-market debt sufficiently while Radiance's onshore banking access appears intact.

Key Rating Drivers

Sales Stabilising at Lower Level: We expect Radiance's total contracted sales to fall by 50% to CNY47 billion in 2022, similar to its performance in 8M22. Sales have underperformed its peers, and we think this is due mainly to a tier 2 and 3 cities focus where demand has been less robust. We do not expect sales to weaken further, given a relatively diversified exposure across five regions in China and a well-established reputation in its core markets. However, a severe resurgence of Covid-19 or further deterioration in homebuyer confidence could lead to weaker-than-expected sales.

Operating Cash Flow Under Control: The company achieved positive operating cash flow in 1H22, and we expect this to stay positive for 2H22 - helped by robust cash-collection rate, limited land-banking expenses and controlled construction cash outflows. We expect the cash-collection rate to stay at around 85% in 2022, similar to 2021. The rate was robust at 93% in 1H22 (2021: 87%), supported by the loosening in mortgage loan policies.

Serviceable Capital Market Maturities: Radiance's financial access to capital markets has been limited so far in 2022. However, it has relatively small maturities over the next 12 months, including domestic bonds of CNY1.22 billion puttable in November 2022, CNY1.35 billion puttable in June 2023 and CNY850 million puttable in July 2023, as well as USD56.6 million senior notes due in September 2023.

Radiance's reported available cash was CNY8.2 billion at end-1H22, sufficient to cover these maturities. We estimate the non-controlling interest (NCI) percentage at the consolidated projects at around 10%, and the company may face less constraint in upstreaming cash to the holding company than its peers with high NCI exposure.

Stable Leverage: Leverage, measured by net debt/net property assets, decreased slightly to 46% by end-1H22 from 48% in 2021 despite a large drop in sales, as the company has not purchased any land so far in 2022. Management said it will not resume land purchasing unless there is a clear sign of recovery in sales, and we have assumed no new purchases within the year. Radiance has over CNY200 billion in sellable resources, excluding sold but unbooked properties, which can support four years of sales at the current scale.

Moderate JV Exposure: Radiance's 10%-15% exposure to joint ventures (JVs), measured by JV net claims/net property assets, is normal for property developers. Management states there is limited cash outflow pressure to JVs, as the company started to prioritise repayment of bank loans at JVs and restrict pre-distribution of sales since 2021. The large reduction in guarantees to JVs (from CNY5.5 billion at end-2020 to CNY1.4 billion by end-2021 and 1H22) somewhat reflects this strategy in JV financial management.

Same SCP with Parent: Fitch rates Radiance based on our Parent and Subsidiary Linkage Rating Criteria. We assessed the Standalone Credit Profiles (SCPs) of Radiance and its parent Radiance Holdings (Group) Company Limited (Radiance Holdings) as being equal. We assessed Radiance Holdings' SCP by taking into account its consolidated profile, including its 96% holding of Radiance, which represents the group's entire exposure to the Chinese homebuilding business. The parent has no other business besides the operations held under Radiance.

Derivation Summary

Radiance's liquidity ratios, measured by available cash/short-term debt and available cash/short-term capital market debt, appear weaker than those of Hopson Development Holdings Limited (B+/Stable). However, Radiance has stated that a large portion of the onshore bonds may not be put. Radiance's land bank quality and sales performance are weaker than those of Hopson, whose total sales fell by only 20% in 8M22. Hopson is focused on tier 1 and strong tier 2 cities, and so recovery of demand and sales could be slower for Radiance. In addition, assets in higher-tier cities may have better institutional appetite. The divergence in sales performance justifies our differing outlooks on the two companies' ratings.

Radiance's liquidity is stronger than that of Central China Real Estate Limited (CCRE, B/Negative) and China SCE Group Holdings Limited (B-/Negative). Radiance's available cash/short-term capital-market debt ratio is much higher than these two peers. Both CCRE and China SCE have to rely on asset disposal or government receivables (in CCRE's case) for debt repayment, which are subject to high execution risks.

Key Assumptions

Total sales to decrease 50% yoy in 2022 based on sales performance in 8M22, and up 2% in 2023 - given the low base in 2022;

Sales collection rate of 85% in 2022 and 2023 (2021: 87%);

Attributable land premium to represent 4% of sales receipts in 2022 and 25% in 2023, based on updated management guidance;

Funding costs at 6.5% for new borrowings (1H22 average: 6.24%).

KEY RECOVERY RATING ASSUMPTIONS

Fitch's recovery analysis assumes that Radiance would be liquidated in a bankruptcy because it is essentially an asset-trading company. The nature of homebuilding means the liquidation-value approach will almost always result in a much higher value than the going-concern approach.

We have assumed a 10% administrative claim in line with criteria.

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 bankruptcy or insolvency proceedings and distributed to creditors.

Advance rate of 80% applied to account receivables. This treatment is in line with our Recovery Rating criteria. Account receivables constitute a very small percentage of total assets for Radiance, as is typical with the Chinese homebuilding industry.

Advance rate of 60% applied to net property inventory. Radiance's inventory consists mainly of completed properties held for sale, properties under development (PUD), and deposits/prepayments for land acquisition. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.

a.	75% advance rate to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory, and typically have high recovery values. Radiance's land bank is mainly located in tier 2 and strong tier 3 cities and relatively diversified.
b.	55% advance rate to PUD. PUDs are more difficult to sell than completed projects. These assets are also in various stages of completion. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.
c.	90% advance rate to deposits/prepayments for land acquisition. Land held for development is closer to readily marketable inventory, similar to completed commodity housing units.

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

50% advance rate to investment properties. Radiance's investment property portfolio consists mainly of commercial buildings located in Beijing, Chongqing, Xi'an and Fuzhou. We considered the 50% advance rate appropriate, as the implied rental yield on the liquidation value for the investment-property portfolio would be close to 6%.

50% advance rate to JV net assets. JV assets typically include a combination of completed units, PUDs and landbank. A 50% advance rate was applied in line with the baseline advance rate for inventories.

Advance rate of 0% applied to excess cash, after netting the amount of note payables and trade payables (construction fee and retention payables). We do not assume available cash in excess of outstanding trade payables would be available for other debt-servicing purposes, and therefore the advance rate for excess cash is 0%.

The allocation of value in the liability waterfall results in recovery for the senior unsecured notes guaranteed by Radiance corresponding to 'RR1'. However, the recovery rating is capped at 'RR4' due to the jurisdiction cap applied to China.

RATING SENSITIVITIES

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

The Outlook would be revised to Stable if the negative sensitivities are not met.

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

No stabilisation in contracted sales or cash collection;

Deterioration in liquidity 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 '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

Liquidity Risk Manageable: Radiance reported available cash of CNY8.2billion at end-1H22, insufficient to cover its CNY13.3 billion of short-term debt. However, CNY7.6 billion (57%) out of the CNY13.3 billion short-term debt was secured bank loans which can typically be refinanced more easily. Another CNY2.4 billion (18%) of short-term debt is secured trust loans, of which Radiance expects the majority can be extended or replaced by development loans as projects enter into construction and the pre-sale stage. The average funding cost in 1H22 was 6.24%, slightly lower than 6.58% in 2021.

Issuer Profile

Radiance, established in 1996, is a multi-regional mid-sized property developer in China. It is 96%-held by Radiance Holdings, which was listed on the Hong Kong Stock Exchange in October 2020 and 84%-held by Chairman Mr Lam Ting Keung.

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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