Chinese property developer Ronshine China was downgraded to B from B+ by S&P with its substantially lower-than-peer project margins dragging profitability and hampering deleveraging. The outlook was stable. S&P expects Ronshine’s project margins to remain low for the next two years. with gross margins at only 11%-12% in 2021 and only moderately improve to 12%-13% in 2022. Ronshine has been impacted due to its high cost of acquiring projects in 2016-18 and price caps that were enforced later on. Ronshine relies on public auctions for land replenishment and this constrains its margins. Besides, land replenishment needs will limit debt reduction. The developer’s unsold land bank was about 19.9 million sq. meters, which may support growth for 2-2.5 years. Its anticipated lower land spending plans in the next three years as compared with ~RMB 30bn ($4.7bn) in 2020 should lead to moderate debt reduction to RMB 65bn ($10bn) in 2021 and RMB 62bn ($9.6bn) to RMB 64bn ($9.9bn) in 2022. Despite the debt decline, S&P forecasts its leverage (debt-to-EBITDA) to remain high at 8.6-8.8x in 2021 and 7.3-7.8x in 2022. The developer faces about RMB 2.5bn ($390mn) in onshore and offshore bond maturities or put options in the remainder of 2021, and RMB 6.7bn ($1bn) in1H2022 and RMB10bn ($1.6bn) 2H2022. If market conditions remain tight, Ronshine will have to rely on internal cash and new borrowings to service debt.

On the positive side, Ronshine has sufficient unrestricted cash of RMB 27.3bn ($4.2bn) to cover its bullet maturities and may control its land acquisitions to meet refinancing needs. Also, its quality projects in higher-tier cities provide good visibility in cash generation and support its liquidity.

Ronshine’s dollar bonds fell over 2 points yesterday. Its 8.1% 2023s fell 3.5 to 86.13 and its 7.1% 2025s fell 2.5 to 80.75.

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