Hong Kong, February 09, 2017 -- Moody's Investors Service says that tightened pre-sale regulations
on commodity properties in the major western Chinese city of Chongqing
by the municipal authorities are credit negative for property developers
because it will weaken their liquidity and limit financial flexibility.
"Developers in China typically use the pre-sale proceeds
from their property projects to repay the related construction financing,
and the tightened requirements will likely increase their upfront capital
requirements, or they will have to find alternative unsecured funding
to repay outstanding secured project loans to meet the new pre-sale
requirements," says Stephanie Lau, a Moody's Assistant
Vice President and Senior Analyst.
"In addition, such regulations will delay developers'
pre-sale cash flows, liquidity and expansion plans,
and they will also likely accelerate industry consolidation for small
and illiquid developers in Chongqing, as they are less likely to
have access to unsecured financing in China," says Kaven Tsang,
a Moody's Vice President and Senior Credit Officer.
According to Hong Kong media reports on 6 February, the authorities
in Chongqing had announced on 4 February that developers must settle all
financing that is secured by the project's land use rights before
they can register for a pre-sale permit. In addition,
developers are not allowed to obtain secured financing for projects that
have been granted pre-sale status.
Moody's conclusions were contained in a just-released report,
"Tightening of Pre-sale Property Regulations in Chongqing
Is Credit Negative for Developers".
Among Moody's rated developers, Longfor Properties Co.
Ltd. (Ba1 positive) and China Aoyuan Property Group Limited (B2
positive) generated around 9%-10% of their contracted
sales in Chongqing in H1 2016 and are more exposed than their peers.
However, we do not expect the tightened measures to materially impact
the two companies because they have strong liquidity, diversified
funding channels and access to the offshore bond market.
They have further strengthened their liquidity by tapping unsecured onshore
funding in the past two years. In 2015 and 2016, Longfor
and China Aoyuan raised RMB19.8 billion and RMB4.4 billion
respectively through the onshore corporate bond market.
Their strong liquidity, as evidenced by their ample amount of cash
on hand, also provides them with strong financial flexibility to
cope with the new requirements. Longfor's cash holdings —
including restricted cash — totaled RMB16.3 billion at end-June
2016, covering 329% of its short-term debt in the
same period. It has maintained a cash/short-term debt ratio
at 240% or higher since 2014.
By contrast, China Aoyuan had cash on hand of RMB10.2 billion
at end-June 2016, covering 248% of its short-term
debt as of the same date.
In the case of Longfor, the company can also collateralize its mature
investment properties in Chongqing to procure secured funding for new
projects under development. It has maintained a long track record
of property development in Chongqing, as well as well good access
to onshore and offshore financing.
For China Aoyuan, Guangdong Province remains its core market,
generating 50% of its contracted sales in H1 2016. Its track
record and solid end-user demand for residential housing in the
province will partly mitigate the impact of potential sales volatility
in Chongqing.
Chongqing is a key market in the central and western part of China,
representing one of the country's four municipalities other than
Beijing, Shanghai and Tianjin that is directly under the administration
of the central government.
Subscribers can access the full report at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059070.
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:
• Inside China: January 2017
• China Property Focus -- January 2017
• Banking System Profile: China
• China Curtails Growth of Short-Term Savings Products,
a Credit Positive for Insurers
• Insurance -- China: China's Proposal to Tighten
Insurers' Shareholding Management Is Credit Positive
• State-Owned Enterprises -- China: Reform to Remain
Gradual With Credit Implications Varying Across Sectors
• China Credit: Implications of Government's Plans to
Reduce Corporate Leverage Are Mixed
• Banking System Outlook -- China: Deteriorating Operating
Environment and Asset Quality Drive Negative Outlook
• Securitization -- China: 2017 Outlook -- Asset
Performance Stable for Auto ABS and RMBS, Negative for CLOs
• Regional and Local Governments -- China: 2017 Outlook
-- High Leverage of State-Owned Enterprises Drives Negative
Outlook
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Stephanie Lau
Asst Vice President - Analyst
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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