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Announcement:

Moody's: Projected 2018 financials suggest rated Chinese developers' credit quality will diverge more

 The document has been translated in other languages

23 Apr 2018

Hong Kong, April 23, 2018 -- Moody's Investors Service says the credit metrics of Chinese property developers it rates will diverge further in 2018, driven by a tougher operating environment.

"Tightening credit conditions will slow sales growth, reduce liquidity, and accelerate industry consolidation," says Franco Leung, a Moody's Senior Vice President.

Moody's expects the rated Chinese property developers' credit metrics to diverge further in 2018. In particular, the metrics of Ba-rated developers will improve more than other rated developers because these companies will strike a better balance among sales, profit and debt growth.

The tightened onshore credit environment will also slow debt growth in 2018 as developers rely more on their existing cash resources to fund land purchases and address debt maturities.

Moody's conclusions are contained in its just-released report, "Property -- China: Projected 2018 financials suggest rated developers' credit quality will diverge more," and is co-authored by Leung and Lai. The report covers 40 developers that reported their full-year 2017 results before 31 March and excludes special purpose vehicles and Caa-rated ones. Moody's rates a total of 57 Chinese property developers.

"The developers' leverage, as measured by revenue/adjusted debt, will improve from a weak level in 2017. In particular, we expect a notable improvement for Ba-rated developers and some single B-rated ones in 2018 because of their strong sales growth in 2017, which will support higher revenue recognition ," says Cedric Lai, a Moody's Assistant Vice President and Analyst.

Moody's estimates that the rated developers' weighted-average revenue/adjusted debt will improve to 66% at year-end 2018 from 56% at year-end 2017, and adjusted debt/adjusted capitalization will likely stay flat at around 63%.

Weighted average EBIT/interest coverage will remain flat at 3.3x in 2018, because rising borrowing costs will offset higher EBIT generation. The interest coverage buffer of Baa-rated developers will decline, while that of Ba-rated developers will remain unchanged, given that their strong EBIT growth will offset increases in interest expenses.

The rated developers' weighted average gross profit margins will likely decline to around 30% in 2018 from a multi-year peak of 31.9% in 2017 because of price caps in many cities and a continued increase in land costs. Margin declines will be smallest for Ba-rated developers because of their better land bank locations and product mixes.

Contracted sales growth will increase more than 20% year on year in 2018 but slow notably from the high level seen in 2017, because of the tightened onshore credit environment and continued tight measures meant to curb speculative demand in the property market.

Liquidity buffers will continue to deteriorate for rated developers, driven by large increases in short-term debt. For the 40 property developers , the weighted average cash/short-term debt ratio deteriorated to 1.5x at year-end 2017 from 2.0x at year-end 2016.

The deterioration was largest for single-B-rated developers, which reflects their weaker liquidity and higher refinancing risk.

Among the 40 rated developers covered in Moody's report, eight showed credit improvements during 2017, while five recorded weakened credit metrics. Moody's has taken five positive actions and no negative action on Chinese property developers since 1 March, yet Moody's expects the pace of positive action to slow through the remainder of the year as operating conditions become increasingly difficult.

Subscribers can read the full report at:

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120614

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

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.

Franco Leung
Senior Vice President
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

No Related Data.
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