Wanda Commercial downgraded to BBB on weaker cash flows

Standard & Poor’s Ratings Services has lowered its long-term corporate credit rating on high-profile Chinese property developer Dalian Wanda Commercial Properties to BBB from BBB+.

“The outlook is negative. We also lowered our long-term greater China regional scale rating on the company to cnA- from cnA+,” it said in a press release issued on Wednesday morning. “We removed all the ratings from CreditWatch, where they were placed with negative implications on January 22. “

S&P credit analyst Matthew Kong said: “The downgrade reflects our view that Wanda Commercial’s aggressive expansion appetite to grow its investment property portfolio could result in higher financial leverage over the next 24 months than we had previously anticipated.

“The company’s cash flows are also likely to weaken because the significant reduction in contracted sales will offset the robust growth in rental income.”

Wanda Commercial’s transition to an asset-light business model carried some uncertainty, S&P said.

The company is controlled by the mainland’s richest man, Wang Jianlin.

The company’s commercial property pipeline consisted of both traditional “asset-heavy” projects, which it self-funded, and “asset-light” projects for which it aimed to team up with external investors to alleviate the funding burden and project risk, but “short-term execution risk is high”.

S&P has lowered its forecast for Wanda Commercial’s sales and revenue in 2016-2017 to reflect the business model transition, expecting the company to maintain its property sales value at 100 billion to 106 billion yuan.

The rating came as two investment banks, Bank of America Merrill Lynch and Nomura, late last month cut the target price for the company’s Hong Kong-listed shares, citing concerns over the strategy which relies solely on fees from services related to project management while working with a financial backer who puts up most of the capital needs.

The “asset light” approach of Dalian Wanda Commercial Properties has come under fire from analysts who warn that the pioneering strategy that relies on management fees and other services income could negatively impact its bottom line income.

Wanda Commercial announced earlier a 39 per cent cut in its 2016 sales target to 100 billion yuan (HK$118.5 billion).

Wanda Commercial’s share price eased 0.28 per cent to HK$35.2 in Hong Kong yesterday.