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Announcement:

Moody's: COLI Acquires Properties from CITIC, a Credit Positive for Both

 The document has been translated in other languages

16 Mar 2016

Hong Kong, March 16, 2016 -- Moody's Investors Service says that China Overseas Land & Investment Limited's (COLI, Baa1 stable) proposed asset acquisitions from CITIC Limited (A3 negative) will enhance COLI's market position in China's property sector.

At the same time, the transaction will help CITIC Limited to reduce its leverage.

Nevertheless, there is no immediate impact on the two companies' ratings or their outlooks.

On 14 March, COLI announced that it has agreed to acquire property-development projects from CITIC for RMB31 billion, in exchange for subscription shares equaling around HKD29.7 billion and a portfolio of properties worth about RMB6.2 billion. CITIC Limited will own 10% of COLI after completion of the acquisition, and China State Construction Engineering Corp Ltd's (A2 negative) stake in COLI will decline to 55.07% from 61.18%.

The deal, which is subject to approval by shareholders and regulators, is credit positive for both COLI and CITIC Limited. We expect the deal to be completed by the third quarter of this year.

"Against the backdrop of consolidation in China's property sector, the acquired projects will strengthen COLI's market position, which will offset the increase in leverage resulting from the deal," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

COLI is among China's top 10 developers in terms of contracted sales. COLI's sales were HKD180.6 billion in 2015, giving it 28% year-on-year growth and approximately 2% of the market.

We believe the land bank COLI will acquire from CITIC Limited, combined with COLI's existing land bank of 44 million square meters in total gross floor area as of June 2015, will support further growth in contracted sales and market share over the next four to five years.

Additionally, the property development projects to be acquired by COLI are located in 25 cities in mainland China, including first-tier and major second-tier cities. The Pan Bohai Rim with 31% of gross floor area, and the Pearl River Delta region with 42% comprise the largest share of the land bank.

This distribution will further strengthen COLI's market position in these two regions and reduce its need to compete for new land in major cities, where costs have risen rapidly in the past one to two years. The new land bank will also broaden its geographic coverage to 42 cities from 33 cities in China.

This sizable acquisition, whose value we estimate is around 25% of COLI's total assets of HKD432 billion as of June 2015, will increase COLI's debt leverage considerably. That's because COLI will also acquire the shareholder loans of approximately RMB33-34 billion the acquired property portfolio owes to CITIC Limited, as well as the bank loans attached to the property portfolio.

Nevertheless, COLI has a strong financial position and the increased debt will be manageable. COLI had low debt leverage with adjusted net debt/net capitalization of 12% as of June 2015. We expect this ratio will double to around 25% after the acquisition and continue to support COLI's strong credit profile.

COLI had cash of HKD77.95 billion at the end of September 2015, which allows the company to manage the repayment of the shareholder loans. Additionally, the new equity issuance to CITIC Limited will increase COLI's equity base.

"For CITIC Limited, the deal will reduce its consolidated debt and improve its leverage. CITIC Limited had around HKD85 billion of debt at its real estate segment at the end of 2014, which we expect the asset sale will largely reduce this level of debt, therefore help lowering CITIC Limited's leverage ratio," says Kai Hu, a Moody's Senior Vice President.

And as a COLI shareholder, CITIC Limited will continue to gain exposure to China's property market through COLI, a more experienced residential property developer to unlock the value of its residential property portfolio.

CITIC Limited will also be able to exchange its illiquid asset portfolio for more liquid listed shares, which it can use as alternative liquidity sources after a two-year lock-up period.

The principal methodology used in rating China Overseas Land & Investment Limited was Homebuilding And Property Development Industry published in April 2015. The principal methodology used in rating CITIC Limited was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

China Overseas Land & Investment Limited (COLI), listed on the Hong Kong Stock Exchange, is a 61.2%-owned subsidiary of China State Construction Engineering Corporation Limited (CSCECL, A2 negative).

At end-June 2015, COLI, excluding its associate China Overseas Grand Oceans Group Limited (Baa2 stable), had a total land bank of around 44.1 million square meters in gross floor area (GFA), covering 33 cities in Mainland China, Hong Kong and Macau.

CITIC Limited — formerly CITIC Pacific — is listed on the Hong Kong Stock Exchange. The conglomerate is 68% owned by CITIC Group Corporation.

CITIC Limited's business portfolio is highly diversified, with operations in businesses, including commercial banking, brokerage, iron ore mining, steel, property, manufacturing, and infrastructure.

The Local Market Analyst for CITIC Limited's rating is Kai Hu, +86 (21) 2057 4012.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Kaven Tsang
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: COLI Acquires Properties from CITIC, a Credit Positive for Both
No Related Data.
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