Hong Kong, July 27, 2016 -- Moody's Investors Service expects its rated property developers in China
(Aa3 negative) will increasingly use mergers and acquisitions (M&As)
to replenish their land banks, expand their geographical footprints
and economies of scale, given the intense competition at public
land auctions that resulted in a surge in land premiums in major cities.
"Acquiring land through M&As could also accelerate project sales
and cash flow generation if those acquired projects have already received
the relevant approvals or are under development," says Kaven
Tsang, a Moody's Vice President and Senior Credit Officer.
"Notwithstanding these benefits, developers' leverage
could increase if the M&A is funded by debt or the acquirer needs
to take on a large amount of debt obligation from the acquired projects,"
adds Tsang.
In addition, Moody's notes that the reform of state-owned
enterprises (SOE) also leads to more opportunities for M&As among
SOEs and will accelerate industry consolidation.
"The sale of property assets by non-property SOEs to large-scale
property developers with state-owned backgrounds will further strengthen
the latter's market leader position and increase their land banks,"
says Cindy Yang, a Moody's Analyst.
Moody's conclusions were contained in the latest edition of its China
Property Focus.
According to the report, growth in nationwide home sales moderated
in June and is expected to soften further to a single-digit percentage
for the 12 months ending May 2017, down from 16.6%
in 2015 and 30.3% for the 12 months ended June 2016.
This expectation reflects a comparison against a high base recorded in
2H 2015 and in 1Q 2016 when stimulus measures spurred strong sales growth.
Moody's expects limited benefits from these measures, while
selective regulatory tightening in higher-tier cities will lead
to lower demand for property in those areas.
The report notes that while all four first-tier cities posted double-digit
year-on-year price growth for the sixth consecutive month,
the growth rate was moderating in June.
The number of cities registering year-on-year price increases
rose to 57 in June from 50 in May. Price growth in second-tier
cities remained on an increasing trend in June. To curb the surge
in prices, regulatory authorities in Hefei raised the minimum down
payment for second or more home purchases or for households who have loan
records from 1 July.
In terms of rating events, there was one downgrade and one upgrade
between 28 June and 26 July 2016.
Of the 50 rated developers, 20 (40%) had negative rating
outlooks as of 26 July 2016. This negative bias was driven mainly
by company-specific issues, including debt-funded
growth or acquisitions, major business transformations, liquidity
and refinancing risks, or weak operating models.
Key topics in this issue of China Property Focus include:
• Sales Growth Moderated in June and Will Soften Further for the
12 Months Ending May 2017
• Price Growth Shows Signs of Moderation
• Large-Scale Mergers and Acquisitions Accelerate Industry
Consolidation
• Liquidity Index Weakened Slightly in June 2016
• One Downgrade and One Upgrade Between 28 June and 26 July 2016
Subscribers can read the full report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_191307
The report may also be found through Moody's topic page "China's Trilemma:
Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
- China's Revised Rules for Insurers' Infrastructure Investments
Are Credit Negative
- Renminbi Bonds Monitor — June 2016
- Chinese Investment Funds: Strong Growth to Continue
- China Credit: Heard From the Market: Contingent Liabilities
a Sizeable But Manageable Risk
- Chinese Banks: Investments in Loans and Receivables Increase
System Risks
- China Credit: Authorities Have Tools to Avert Financial
Crisis, but Erosion of Credit Quality Likely
- Government of China: Why does the build-up in corporate
leverage matter to the sovereign?
- Regional and Local Governments — China: Stabilization
Benefit of Property Taxes Will Take Time to Materialize
- Auto ABS — China: Delinquencies Will Rise After Holding
Steady in Q1 2016
- China Credit Market: Negative Credit Events Highlight Offshore/Onshore
Investor Protection Disparity
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This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
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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.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
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