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Announcement:

Moody's: China Jinmao's high leverage reduces rating headroom

Global Credit Research - 11 Aug 2017

Hong Kong, August 11, 2017 -- Moody's Investors Service says that China Jinmao Holdings Group Limited's rising leverage during 1H 2017 reduces its rating headroom. Nevertheless, this development will not immediately affect its Baa3 issuer rating or the stable outlook on the rating.

"China Jinmao's growing revenue and good profitability continue to support its rating, while its adequate liquidity and good access to funding partly reduce the risk associated with its high leverage," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer, and also the International Lead Analyst for China Jinmao.

China Jinmao's total revenue in 1H 2017 grew significantly by 104% year-on-year to RMB17.8 billion, backed by its strong sales performance over the last 1-2 years. The company's contracted sales grew 11% year-on-year to RMB28.8 billion during the seven months between January and July 2017; a result which will continue to support revenue growth over the next 1-2 years. The company had around RMB53 billion in unbooked revenue at end-June 2017.

With more property projects and primary land to be launched during 2H 2017, Moody's believes that China Jinmao is on track to achieve its full-year sales target of totaling RMB58 billion, supported by its quality land bank, differentiated products and good sales execution.

"On the other hand, China Jinmao's adjusted debt increased by around 29% to RMB68 billion from RMB53 billion in 2016, against the backdrop of its active land acquisitions," says Cindy Yang, a Moody's Assistant Vice President and Analyst, and also the Local Market Analyst for China Jinmao.

During the seven months from January to July 2017, the company — together with its partners — acquired 16 parcels of land for a total consideration of approximately RMB58.5 billion. The attributable land cost to China Jinmao was around RMB25-RMB30 billion.

While China Jinmao is likely to acquire further land parcels in Tier-1 and major Tier-2 cities to support its sales target of RMB100 billion in 2019, Moody's believes the company will continue its strategy of developing sizable and high-cost projects with partners to alleviate the related capital requirements and execution risks.

The increase in debt was also partly due to the company issuing low-cost bonds in 1H 2017 to refinance its higher-cost maturing bonds in 2H 2017.

Moody's expects that China Jinmao's debt leverage — as measured by adjusted debt/capitalization — will fall modestly to around 50%-52% over the next 12 months compared to 53%-54% at end-June 2017. Such levels leave China Jinmao with limited rating cushion if its sales performance proves significantly volatile or if it continues to take on excessive debt funded land acquisitions.

Nevertheless, Moody's points out that the company has shown discipline in managing its debt leverage over the past five years.

Moody's explains that China Jinmao's rating will be under pressure if its leverage is sustained at a level higher than Moody's expects over the next 6-12 months.

Moody's further expects that China Jinmao will maintain a gross profit margin of around 33%-34% over the next 12 months versus 35.9% in 1H 2017. In particular, its high gross margin on primary land developments, property leasing and hotel operations can partly mitigate the squeeze on profit margins, owing to rising land costs associated with its property development business.

As a result, Moody's estimates that China Jinmao's EBIT interest coverage will remain between 3.8x and 4.0x over the next 12-18 months; a result which can support its Baa3 rating.

China Jinmao's status as a state-owned enterprise and its quality investment portfolio provide it with good access to onshore and offshore funding. Its average borrowing cost stayed low at 4.59% in 1H 2017, almost unchanged from the 4.56% in 2016.

China Jinmao's rating is also supported by the steady income from its quality investment properties, comprising office buildings, hotels and retail malls. These properties are well located and contributed gross revenue of about RMB1.7 billion in 1H 2017, representing a 9.5% year-on-year growth.

Moody's expects that China Jinmao's non-development revenue will keep growing, as the company continues to add hotels and other commercial properties to its portfolio.

The company's liquidity position remains adequate, despite its increased land investments. Its cash balance reached an historic high of RMB21.6 billion at end-June 2017. This amount, together with its cash proceeds from contracted sales, will enable it to meet its short-term debt of RMB19.2 billion and committed attributable land payments.

The company's issuance of USD300 million in senior guaranteed perpetual capital securities and RMB2.5 billion in 3-year medium-term notes in July 2017 has further enhanced its liquidity and lengthened its debt maturity.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in April 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed on the Hong Kong Stock Exchange in 2007, China Jinmao Holdings Group Limited is a subsidiary of Sinochem Hong Kong (Group) Company Limited (A3 stable), which is in turn 100%-owned by Sinochem Corporation.

Sinochem Corporation is a joint-stock limited company, 98%-owned by Sinochem Group, which is a pure holding company and directly owned and supervised by the State-Owned Assets Supervision and Administration Commission of China's State Council.

China Jinmao develops residential and commercial properties in Tier-1 and major Tier-2 cities in China. It has also invested in primary land development projects in Changsha in Hunan Province and Nanjing in Jiangsu Province.

The Local Market analyst for this rating is Cindy Yang, +86 (10) 6319-6570.

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
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

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