Fitch Affirms Wanda Commercial at 'BB+'; Outlook Stable

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Fitch Affirms Wanda Commercial at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): https://www.fitchratings.com/site/re/10086196 Fitch Ratings-Hong Kong/Shanghai-August 14: Fitch Ratings has affirmed Dalian Wanda Commercial Management Group Co., Ltd.'s (Wanda Commercial) Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and the ratings on its outstanding US dollar senior notes at 'BB+'. The Outlook on the IDR is Stable.Fitch thinks that Wanda Commercial's Standalone Credit Profile remains strong at 'bbb+', due to robust rental and management fee revenue generation and continued Wanda Plaza expansion. However, Wanda Commercial's rating is constrained by the consolidated credit profile of Dalian Wanda Group Co., Limited (Wanda Group), which Fitch assesses to be at 'bb+' due to weak entertainment-related businesses and the higher leverage of the group. Wanda Group owns 43.7% of Wanda Commercial. Key Rating Drivers Wanda Group Constrains Rating: The parent and subsidiary linkage between Wanda Commercial and Wanda Group is assessed as 'Moderate', which under Fitch's Parent and Subsidiary Rating Linkage criteria, would result in Wanda Commercial's ratings being rated at the weaker consolidated credit profile of its parent at 'bb+'. Wanda Group's consolidated credit profile is mainly driven by Wanda Commercial and Beijing Wanda Cultural Industry Group Co., Ltd (Wanda Culture). Wanda Commercial contributed around 80% and Wanda Culture 20% of the group's consolidated EBITDA in 2018. Fitch estimates that Wanda Group has a 'bb+' consolidated credit profile, due mainly to Wanda Culture's high leverage and Wanda Group's limited transparency of its rather aggressive business strategy. Fitch estimates Wanda Culture's consolidated total adjusted debt/EBITDAR was around 8.5x at end-2018 versus 10.0x at end-2017, and its operating EBITDAR/interest paid + rents has been around 1.4x at end 2017-2018, mainly driven by AMC Entertainment Holdings, Inc.'s financials. Fitch affirmed and withdrew the rating of AMC, which accounts for around 50% of Wanda Culture's EBITDA, at 'B' with Stable Outlook in December 2018. Standalone Credit Profile 'bbb+': Wanda Commercial has a strong property portfolio in line with 'A' rated property investment companies due to its large size, asset diversification, and strong operational performance throughout business cycles. It is the largest shopping mall owner in China and one of the largest commercial property owners rated by Fitch. It owned 280 Wanda Plazas in China, with total leasable floor area (LFA) of 28 million sq m at end-2018. The Wanda Plazas generated more than CNY30 billion in rental and management fee income in 2018, representing a 22.8% increase yoy that is driven by 6% rise in average rent to CNY110.6/sq m a month and LFA increase of 18%. Wanda Commercial aims to open another 43 shopping malls in 2019, of which 70% will be through asset-light cooperative projects model. Wanda Commercial's business profile is however constrained by limited operational information disclosures.Fitch estimates that the company's rental and management revenue will continue to increase by around 10% in 2019-2020, mainly through LFA expansion. Fitch estimates that Wanda Commercial's recurring EBITDA was CNY21.3 billion, including both Wanda Commercial's mall and hotel operations, in 2018. Its recurring EBITDA net interest coverage was 2.3x at end-2018, and Fitch expects it to increase and then stabilise at above 2.6x in 2020, commensurate with 'bbb+' credit strength. Wanda Commercial's net debt/recurring EBITDA increased slightly to 5.1x by end-2018 from 4.7x at end-2017, after accounting for only 40% of its CNY16.6 billion wealth management product investment as cash. Fitch expects net debt/recurring EBITDA will be sustained below 6.0x after such adjustment in 2019-2020.Asset-light Strategy Speed-Up: Fitch expects Wanda Commercial to add 30 asset-light cooperative projects each year in 2020-2021, charging 30% of net rent from the mall owners each year. It already has plans to add 29 cooperative projects in 2019 after speeding up the transition in 2018 with 18 compared with five in 2017. Wanda Commercial had a total of 42 unconsolidated and non-self-owned asset-light malls in operation as of end-2018: 19 projects in four asset packages with CITIC Trust Co., Ltd., Minsheng Trust Co., Ltd. and Pearl River Life Company Limited; as well as 23 cooperative projects. The asset-light cooperative projects will help Wanda Commercial maintain revenue growth at around 10%, but will lower the company's current rental gross profit margin below 75% in the medium-term from 80%, as cooperatives usually have a gross profit margin of around 40%, after deducting the lease expenses as cost of sales. Property Development Exit Transfers Risks: Fitch thinks that Wanda Commercial's exit from the volatile development business by 2019 is credit-positive. The exit reduces its own policy and market risks, and it will not have to maintain an excessively high cash balance in preparation for land replenishment. This then helps bolster its recurring EBITDA interest coverage. Wanda Commercial estimates it will generate CNY30 billion in contracted sales and incur around CNY20 billion in construction costs for the remaining development projects in 2019. Wanda Commercial will dispose of the rest of the projects to Wanda Properties Group Co. Ltd. (established in 2018 and wholly owned by Wanda Group) by the end of 2019. This will transfer the development business risk outside of Wanda Commercial, but this business remains in the Wanda Group and still affects Wanda Group's consolidated credit profile. Derivation Summary Wanda Commercial's investment property portfolio is comparable with those of major global investment property companies, such as Simon Property Group (NYSE: SPG ), Inc. (A/Stable), Swire Properties Limited (A/Stable) and Unibail-Rodamco (AS: URW ) SE (A-/Stable). Wanda Commercial's investment property portfolio of over 280 retails malls is more comparable with Simon Property, which has over 200 retail outlets. Wanda Commercial's strong retail mall portfolio is in line with 'A' rated property investment companies due to its large size, asset diversification, and strong operational performance throughout business cycles. Wanda's credit metrics are weaker than the three peers' as its recurring EBITDA interest coverage of 2.0x-3.0x is lower than its peers' average of more than 5.5x. Wanda's rating is also constrained by the weaker consolidated credit profile of its parent Wanda Group due to its moderate linkage with its parent, according to Fitch's Parent and Subsidiary Rating Linkage criteria. No country-ceiling or operating environment aspects affect the rating. Key Assumptions - Wanda Commercial will open 43 to 45 new Wanda Plazas in 2019 with around 80,000 sq m of LFA each, out of which 30 malls will be under asset-light business model. - Asset-heavy shopping malls will have a gross profit margin of around 80% and asset-light shopping malls will have a gross profit margin of around 40%. - Rental and property management fee income will increase by 11%-12% in 2019-2020. - Capex of around CNY13 billion each year in 2019-2020.- Wanda Commercial will wind down its property development business before the end of 2019.- Available cash balance (including 40% of wealth management products) to be maintained at around CNY70 billion in 2019-2020. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action- Improvement in Wanda Group's information transparency or consolidated credit profile- IPO of Wanda Commercial that establishes effective ringfencing and improves corporate governanceDevelopments That May, Individually or Collectively, Lead to Negative Rating Action- Inability to execute asset-light business model that leads to net debt/recurring EBITDA above 7x for a sustained period- Wanda Commercial's recurring EBITDA/net interest below 2.5x after 2020 for a sustained period- Deterioration in Wanda Group's consolidated credit profile Liquidity and Debt Structure Sufficient Liquidity: Wanda Commercial had more than CNY85 billion in available cash at end-2018, after including CNY1.3 billion pledged bank deposits to obtain borrowings, and 40% of CNY16.6 billion wealth management products - mostly issued by commercial banks - with less than a year maturity. The available cash is sufficient to cover its CNY47.8 billion in short-term debt, including puttable onshore bonds in 2019 and principal value adjustment. Wanda Commercial has kept its offshore funding channel open and issued a new offshore USD300 million 6.25% 363-day notes due in February 2020.ESG CONSIDERATIONSUnless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - 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.Wanda Commercial has an ESG relevance score of 5 for financial transparency because its ratings are constrained by its parent subsidiary linkage with Wanda Group, which has limited information disclosures. Fitch is able to obtain Wanda Group's financial reports for 2018, but we are not assured of having access to the operational and financial information of Wanda Group and its principal subsidiaries, including Wanda Culture and its newly established Wanda Properties, on a consistent basis. The uncertainty with Wanda Group's financial transparency has negatively affected the group's rating assessment, which capped Wanda Commercial's rating.Wanda Group's financial transparency has a negative effect on the consolidated credit profile, and is relevant to the rating in conjunction with other factors.For more information on our ESG relevance scores, visit www.fitchratings.com/esg. Dalian Wanda Commercial Management Group Co., Ltd.; Long Term Issuer Default Rating; Affirmed; BB+; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; BB+ Wanda Properties International Co. Limited ----senior unsecured; Long Term Rating; Affirmed; BB+ Contacts: Primary Rating Analyst Edwin Fan, Director +852 2263 9958 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Rating Analyst Chloe He, CFA, , CFA Director +86 21 6898 7970 Committee Chairperson Su Aik Lim, Senior Director +852 2263 9914

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Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019) https://www.fitchratings.com/site/re/10058988 Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) https://www.fitchratings.com/site/re/10036366 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10085660 Solicitation Status https://www.fitchratings.com/site/pr/10085660#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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