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13 May 2005
MOODY'S ASSIGNS FIRST-TIME PROSPECTIVE (P)Baa3 RATINGS TO CHINA OVERSEAS LAND & INVESTMENT; OUTLOOK STABLE
Hong Kong, May 13, 2005 -- Moody's Investors Service has assigned a prospective (P)Baa3 rating
to the proposed senior unsecured bonds to be issued by China Overseas
Finance (Cayman) I Limited and guaranteed by China Overseas Land &
Investment Ltd (COLI). At the same time, Moody's has
assigned a prospective (P)Baa3 issuer rating to COLI. The ratings
outlook is stable. This is the first time that Moody's has
assigned a rating to COLI. The rating agency expects to confirm
these ratings upon completion of the bond issuance. The bond proceeds
are to be used to refinance existing debts and fund future capital expenditure
The (P)Baa3 ratings reflect the following key credit strengths of COLI:
(1) strong local knowledge and project management expertise support the
company's position as one of the leading property developers in
China, (2) possession of low-cost and sizeable landbank enables
business flexibility; (3) diversification into second-tier
cities should lower exposure to a few core markets, and (4) strong
credit metrics with large cash holding.
At the same time, the ratings reflect the following key credit challenges:
(1) cash flow being susceptible to volatility in the property development
business, (2) the uncertain operating environment of the evolving
China property markets, which are vulnerable to regulatory and policy
changes, (3) the low level of stable recurring income, and
(4) the company's ability in managing its expanding business through
property cycles in China is yet to be proven.
COLI is a leading residential property developer in China and has strong
brand equity in the industry. Its long presence of over 10 years
in the Mainland and good relationship with local governments through its
close ties with its ultimate parent, China State Construction Engineering
Corp (CSCEC) -- which is the largest construction company in China
directly under the central government -- have enabled it to build
up a profound understanding of domestic market conditions and regulatory
requirements. This, coupled with the CSCEC group's
expertise as a leading construction contractor in the Mainland,
has allowed COLI more effective cost control and project management of
its Mainland residential property developments, one of the key operating
challenges in China.
COLI has established strong presences in its four core markets:
Shanghai, Shenzhen, Guangzhou and Beijing. It has,
recently, begun diversifying into other large provincial cities,
such as Chengdu, Xian, Suzhou and Nanjing in view of possible
overheating in some of its core markets. Moody's believes
that this strategy entails some business and execution risks, but
COLI's selective approach and local knowledge will help mitigate
these. Such a strategy, if successfully implemented,
will offer geographic diversification to its income and asset in the medium
term, as these cities exhibit decent economic growth and their property
markets are generally less competitive than COLI's 4 core ones.
The (P)Baa3 ratings further reflect Moody's concern about the highly
cyclical and unpredictable China property markets -- a result of
their developing nature and changing regulations and policies --
although Moody's acknowledges that long-term housing demand
prospects remain favorable, driven by continued economic growth
and urbanization trend in China.
Operating in this high business risk environment, COLI's cash
flow is subject to higher volatility than its peers in other regions.
Furthermore, the company's ability to manage its expanding
business and demonstrate strong cash flow generation in China is yet to
be proven, as the China property markets have been on the uptrend
in past years.
Countering this high business risk, the (P)Baa3 ratings factor in
the agency's expectation of COLI's commitment to diligently
managing its borrowings, containing its leverage below 30%
over the medium-term and maintaining minimum cash equivalent to
10% of total assets. Moody's further expects the company
to maintain strong discipline in its future property developments and
Moody's takes comfort that COLI's current large and low-cost
landbank, due to the company's early entry and good local
relationships, could provide some degree of business and operational
flexibility to help weather a down-cycle. Its 9.5
million m² landbank is sufficient for about 4-5 years of development.
In addition, COLI has good access to the bank loan market --
even in face of China's tightened lending to the property sector
-- supported by its established and extensive relationships with
banks in Hong Kong and China. Moody's expects that any further
tightening of property financing or policies in China will not materially
interrupt COLI's funding access, given its healthy financial
profile and established market position.
COLI is seeking to optimize its income mix over the medium term while
continuing its core development business in order to lower the impact
on its cash flow of property development cyclicality and reduce the risk
of exposure to a single market. Aside from expanding into selected
provincial cities, it seeks to raise the level of more stable income
accruing from its infrastructure projects and property investments to
30% of EBIT (excluding EBIT from the construction business which
is to be spun-off) over the next 5 years from 13% in FY2004.
While this measure introduces a degree of event risk, Moody's
expects that the diversification will be progressive and investments will
focus on completed and income-generating assets with reasonable
Leverage is projected to peak in FY2005 at mid-30% and Moody's
expects debt service ratios to improve afterwards with expected strong
cash inflow from properties sale beginning in 2007, given its development
completion schedule. As a result, leverage is anticipated
to trend down to mid-20% in FY2007-2008 while Operating
cash flow (OCF)+Int/Int should remain above 10x on average over the
next few years.
The level of contingent liabilities with respect to counter indemnities
for construction projects is expected to reduce. This is because
COLI intends to spin-off its Hong Kong construction business into
a separate company for listing on the Hong Kong Stock Exchange.
Moody's understands that most of the surety bonds for construction
projects will be taken over by the new company and it will also counter-guarantee
any remaining bonds issued by COLI. Taken this into consideration,
adjusted leverage is projected to be at mid-30% by FY2007-2008.
Moody's considers the proposed spin-off of COLI's construction
business and the listing of 79%-owned China Overseas Property
Group (COP) on the Shanghai A-share market, while introducing
a certain degree of structural complexity, as neutral to COLI's
COP holds property developments and investment operations in Beijing,
Shenzhen, Changchun and Nanjing. It is COLI's intention
to retain a majority interest and management control of COP after its
listing and as such, COP's performance and financials will
continue to be fully reflected in COLI's consolidated financial
The ratings could experience upward pressure if leverage were maintained
at below 20% and OCF+Int/Int at above 15x on a sustainable
basis. This could stem from (1) successful diversification of property
development business into second-tier cities, (2) significant
increase in absolute level of stable recurring income from infrastructure
investments, and/or (3) achievement of project development and sales
as projected by the company. In addition, COLI has to exhibit
the ability to effectively manage its financial profile over the property
cycle in China.
On the other hand, the ratings could undergo a downgrade if COLI's
key financial metrics did not show improving trend after 2005 which could
be a result of (1) a significant downturn in China's property market
and no counterbalancing actions were taken by COLI, such as de-leveraging,
or (2) an aggressive land acquisition plan or a capex plan for infrastructure
investments that did not provide adequate returns, such that leverage
> 30% and OCF+Int/Int < 8x across the cycle.
China Overseas Land & Investment Limited (COLI), a majority-owned
subsidiary of the state-owned China State Construction Engineering
Corporation (CSCEC), is one of the largest property developers in
China. Its principal businesses are residential property developments,
property investments and management and infrastructure project investments.
Corporate Finance Group
Moody's Asia Pacific Ltd.
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
No Related Data.
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