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Rating Action:

Moody's affirms Central China's ratings; outlook stable

 The document has been translated in other languages

31 May 2018

Hong Kong, May 31, 2018 -- Moody's Investors Service has affirmed Central China Real Estate Limited's (CCRE) Ba3 corporate family rating and B1 senior unsecured debt ratings.

The ratings outlook is stable.

RATINGS RATIONALE

"CCRE's Ba3 corporate family rating (CFR) reflects its leading market position in Henan Province and its track record of stable growth in contracted sales over the past five years," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer and also the Lead Analyst for CCRE.

Moody's expects CCRE's contracted sales will grow to around RMB35-40 billion in the next 12-18 months, after registering 51% year-on-year growth to RMB30.4 billion in 2017. In the first four months of 2018, CCRE's contracted sales grew 43.9% year-on-year to RMB8.4 billion.

Its solid sales performance will support the company's revenues and EBIT growth in the next 12-18 months, and partly mitigate the effect of rising debt to fund its fast-growth plan.

Additionally, CCRE is developing its management entrustment business, which will generate a total of around RMB2.6 billion to RMB2.9 billion in royalty fees to be distributed in the next three to five years. This income will partly reduce the volatility in the company's property development cash flow.

"On the other hand, CCRE's Ba3 CFR reflects the company's geographic concentration in Henan, as well as the execution risks and increasing funding needs associated with the company's fast growth plan," adds Tsang.

The delay in construction experienced in 2016 reflects the company's execution challenges in managing both its fast sales growth and the timely delivery of products. Since then, CCRE has strengthened its management team and project execution and delivery, as reflected by the company's revenue growth in 2017.

Moody's projects CCRE's adjusted revenue/debt (adjusted with the financials of its joint ventures [JVs]) will moderate down to 80%-90% from 97% in 2017 because of its debt-funded expansion. Meanwhile, its adjusted EBIT/interest (adjusted with the financials of its JVS) will fall slightly to around 2.5x over the next 12-18 months from 2.8x for 2017. These projected ratios position the company's CFR at the Ba3 rating level.

CCRE's adequate liquidity also provides the company with flexibility to manage potential market volatility and supports its Ba3 CFR.

CCRE had total cash of RMB13.4 billion at the end of 2017, which could fully cover its short-term debt of RMB4.4 billion as of the same date and an estimated unpaid land premium of around RMB3.5-4 billion over the next 12 months. CCRE's adjusted cash/short-term debt — including amounts due to and from its joint ventures — was at 159% at the end of 2017.

The B1 senior unsecured debt rating is one notch lower than the company's CFR due to structural subordination risk.

This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination.

As a result of these factors, the expected recovery rate for claims at the holding company will be lower.

The stable rating outlook reflects Moody's expectation that CCRE will maintain its (1) leadership position in Henan Province and generate sales growth; (2) adequate liquidity levels; and (3) disciplined approach to land acquisitions.

Upward rating pressure is limited in the near term, given CCRE's high geographic concentration and the execution risks associated with its fast growth plan.

Nevertheless, an upgrade could occur over the medium term if CCRE (1) consistently achieves its sales targets; (2) demonstrates a track record of good financial discipline by keeping adjusted cash/short-term debt above 2.0x, adjusted revenue/debt above 95%-100% and adjusted EBIT/interest above 4.0x-4.5x, all on a sustained basis (the ratios adjusted for JV financials); and (3) broadens its geographic coverage in a disciplined manner and strengthens its offshore banking relationships.

The ratings could however come under downward pressure if (1) CCRE experiences significant sales declines; (2) the company suffers a material decline in its profit margins; (3) CCRE accelerates its expansion, such that its liquidity position deteriorates or its debt levels rise materially, or both; or (4) construction delays become more frequent and the company is unable to make up for the lost time and misses deadlines on project deliveries.

Specific indicators for a downgrade include (1) adjusted cash/short-term debt below 1.0x-1.5x, (2) adjusted EBIT/interest consistently below 2.5x-3.0x, or (3) adjusted revenue/debt below 80% on a sustained basis. The ratios are adjusted for JV financials.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Central China Real Estate Limited is a leading property developer in Henan Province, with a land bank of 31.88 million square meters at the end of 2017. It was founded in 1992 and listed on the Hong Kong Stock Exchange in June 2008.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

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

No Related Data.
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