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Rating Action:

Moody's affirms China Aoyuan's B1 CFR; outlook positive

 The document has been translated in other languages

25 May 2020

Hong Kong, May 25, 2020 -- Moody's Investors Service has affirmed China Aoyuan Group Limited's B1 Corporate Family Rating (CFR) and its B2 senior unsecured ratings on its existing bonds.

The outlook remains positive.

RATINGS RATIONALE

"The affirmation of China Aoyuan's B1 CFR reflects our expectation that China Aoyuan will be able to execute its business plans despite the challenging operating conditions in China's property sector," says Celine Yang, a Moody's Assistant Vice President and Analyst.

"The positive outlook reflects our expectation that China Aoyuan's credit metrics will improve over the next 12-18 months, driven by improved revenue recognition from its sizable pre-sold, unrecognized contracted sales and its controlled debt growth," adds Yang.

Specifically, Moody's expects China Aoyuan's debt leverage -- as measured by revenue/adjusted debt -- will improve to 70%-80% in the next 12-18 months from 48% in 2019, underpinned by its strong contracted sales growth over the past one to two years. Similarly, its interest coverage -- as measured by adjusted EBIT/interest coverage -- will likely improve to around 3.0x in the next 12-18 months from 2.4x in 2019.

China Aoyuan's contracted sales fell 19% year-on-year to RMB23.0 billion in the first four months of 2020 due to the impact from the coronavirus outbreak. But Moody's expects contracted sales will remain largely stable in 2020 when compared to 2019, supported by abundant saleable resources and the company's good execution track record. The company registered 29% year-on-year growth in contracted sales to RMB118.1 billion in 2019.

China Aoyuan's B1 CFR continues to reflect its (1) strong execution capability even during previous down cycles; (2) established brand in the economically strong Guangdong Province; and (3) good access to onshore and offshore funding.

On the other hand, the B1 CFR is constrained by its high debt leverage and the execution risk associated with its rapid business expansion. The CFR also considers its modest debt capital structure, given its relatively high level of short-term debt. China Aoyuan's short-term debt accounted for around 44% of its total reported debt as of year-end 2019, up slightly from 41% as of year-end 2018.

Moody's regards the impact of the deteriorating global economic outlook amid the rapid and widening spread of the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

With respect to governance risk, China Aoyuan's B1 CFR has considered the company's concentrated ownership by its key shareholders, Guo Zi Wen and Guo Zi Ning, who held a total 55.2% stake in the company as of 2 January 2020. Such risk is partially mitigated by the presence of internal governance structures and disclosure standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.

The company also has three special committees, namely an audit committee, remuneration committee and nomination committee. All these committees are either chaired by or dominated by independent nonexecutive directors and can have a supervision function.

The company has a stable dividend policy, as seen by its dividend payout of around 35%-40% of its net profit over the past three years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

China Aoyuan's rating could be upgraded if the company (1) achieves sustainable growth in its contracted sales and revenue through the cycles without sacrificing its profitability; (2) maintains prudent practices in its land acquisitions and financial management; (3) improves its credit metrics, such that EBIT/interest registers 3.0x or above and revenue/adjusted debt stays within 75%-80% or above on a sustained basis; and (4) maintains good liquidity, such that its cash on hand consistently covers its short-term debt and there is sufficient capacity under its maintenance covenants for bank loans.

A rating downgrade is unlikely, given the positive outlook.

However, the outlook on the rating could return to stable if contracted sales growth slows or becomes more volatile, or if the company's credit metrics weaken, such that its (1) EBIT interest coverage falls below 2.5x; (2) revenue/adjusted debt fails to trend toward 70%; or (3) liquidity weakens, with its cash holdings slipping below 1.0x short-term debt.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/research/Homebuilding-And-Property-Development-Industry--PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China Aoyuan Group Limited is one of the leading property developers in China focusing on the development of mass market properties. In March 2019, China Aoyuan spun off its property management arm, Aoyuan Healthy Life Group Company Limited. (Aoyuan Healthy Life), which was listed on Hong Kong Stock Exchange.

As of 31 December 2019, the company had property projects in China, Australia, Canada, Hong Kong and Macao, with a total land bank of about 45.0 million square meters in gross floor area (GFA), which can cover around three years of property development.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

YuYing (Celine) Yang
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.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Franco Leung
Associate Managing Director
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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