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Announcement:

Moody's: Gemdale's modest 1H 2015 results reflected in its negative rating outlook

 The document has been translated in other languages

01 Sep 2015

Hong Kong, September 01, 2015 -- Moody's Investors Service says that Gemdale Corporation's credit metrics for 1H 2015 remained modest and continue to position it at the weaker end of its Ba1 corporate family rating.

Gemdale's results for 1H 2015 are in line Moody's expectations, and are reflected in the company's negative rating outlook.

"Gemdale's revenue/adjusted debt weakened moderately to 98% for the 12 months ended 30 June 2015 from 107% in 2014 due to an 11% decline in reported revenue to RMB8.1 billion and a slight increase in borrowings in 1H 2015. This leverage position is considered weak for its Ba1 rating," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

The revenue decline was a result of an increase in the delivery of mass market products in 1H 2015 and an increased use of joint ventures (JVs). Revenues in these JVs were not reported in Gemdale's financial statements.

As the company increases its use of JVs, corporate transparency will decrease. On the other hand, the pressure on the company's debt leverage might be reduced.

For example, Gemdale made 13 land acquisitions with a total gross floor area of 2.48 million square meters in 1H 2015 and 11 of these were acquired through joint ventures. Its attributable investment was RMB5.75 billion, versus its total investment of RMB14 billion.

Its gross debt thus increased only mildly to RMB43.29 billion at end-June 2015 from RMB40.96 billion at end-2014.

Gemdale has increased its investments in JVs in the last 1-2 years, but its exposure to JVs remains low. At end-June 2015, the company's investments in JVs and associates accounted for only 3.6% of its total assets.

Moody's will continue to monitor Gemdale's contributions as well as its debt exposure to JVs, and will assess their implications on the company's financial position.

On the other hand, Gemdale's EBIT/interest coverage remained stable at 4x for the 12 months ended June 2015 as improvements in profit margins and a reduction in funding costs have tempered the impact of the revenue decline.

Gemdale's average borrowing cost also fell to 5.9% in 1H 2015 from 6.3% in 2014, owing to the rate cuts in China and the company's issuance of low-cost medium term notes (MTNs) in the onshore debt markets.

Moody's notes that the company issued two MTNs in April and August this year and their coupon rates were 4.9% and 4.6%, respectively.

As a result, Moody's expects Gemdale's EBIT/interest coverage to stay largely stable at 3.8x-4.0x over the next 12-18 months.

As for contracted sales, Gemdale's strong year-to-date performance supports its Ba1 rating.

In the first seven months of 2015, Gemdale achieved 37.3% year-on-year growth in contracted sales totaling RMB26.9 billion, which included contracted sales from JVs.

This achievement outperformed the national average of 16.8% and to some extent, supports the company's liquidity.

Gemdale's liquidity remains adequate. Though its cash to short-term debt dropped to 94% at end-June 2015 from 114% as of end-2014, Moody's estimates that this ratio should improve to 107% after the RMB2.5 billion MTN issuance in August.

The company's investments in short-term asset management products -- with a maturity of no longer than three months -- totaled around RMB1 billion at end-June 2015, and also supports its liquidity.

Moreover, Gemdale's cash balance of RMB17.9 billion at end-June 2015 and projected operating cash flows are sufficient to cover its short-term debt of RMB19.1 billion, as well as committed land payments over the next 12 months.

The ratios above are calculated based on Moody's standard adjustments and the definition stated in Moody's Homebuilding And Property Development Industry published in April 2015. The interest coverage formula is modified for Chinese developers to substitute "capitalized interest" in the numerator for "interest charged to cost of goods sold", as the latter is not separately disclosed in audited financial statements. Total debt does not include adjustments for mortgage guarantees.

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

Incorporated in China, Gemdale Corporation is one of the leading developers in China's residential property sector. It began its property development business in Shenzhen in 1993 and has progressively expanded its business to cover China's seven major regions. At end-June 2015, its land bank totaled around 26 million square meters in gross floor area.

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: Gemdale's modest 1H 2015 results reflected in its negative rating outlook
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