Hong Kong, April 25, 2022 -- Moody's Investors Service has affirmed China Overseas Land & Investment Limited's (COLI) Baa1 issuer rating.
At the same time, Moody's has affirmed the following ratings of COLI's wholly-owned financing vehicles:
The (P)Baa1 senior unsecured rating on China Overseas Finance (Cayman) VIII Limited's medium-term note program, which is guaranteed by COLI.
The Baa1 senior unsecured ratings on the bonds issued by China Overseas Finance (Cayman) III Limited, China Overseas Finance (Cayman) V Limited, China Overseas Finance (Cayman) VI Limited, China Overseas Finance (Cayman) VII Limited and China Overseas Finance (Cayman) VIII Limited, which are guaranteed by COLI.
All the rating outlooks remain stable.
"The rating affirmation reflects COLI's good track record of disciplined financial management, solid financial profile, and excellent liquidity through various industry cycles. These strengths could provide the company with a strong buffer to manage through the challenging operating environment," says Kaven Tsang, a Moody's Senior Vice President.
"The stable outlook reflects our expectation that COLI will maintain its solid operations and credit metrics, as well as its excellent liquidity and good access to funding over the next 12-18 months," adds Tsang.
RATINGS RATIONALE
COLI's Baa1 issuer rating reflects the company's strong branding and leading market position in China's property sector.
COLI also has a track record of maintaining a disciplined and prudent approach to financial management. Its low net debt leverage and excellent liquidity provide the company with a buffer against execution risks associated with the cyclical property development business and the current tough business condition in China's property market.
The Baa1 issuer rating also reflects the growing rental income from the company's commercial property portfolio, which provides a stable recurring income stream and mitigates volatility in its cash flow from property sales.
At the same time, the rating reflects the company's exposure to industry cyclicality and regulatory risks; the sector's declining profitability; and the company's continued funding needs to grow its business.
Moody's expects COLI's full-year contracted sales to fall 5%-10% in the next 1-2 years, compared with a 2.4% increase to RMB369.5 billion in 2021 from the previous year.
COLI's contracted sales declined 46% to RMB48.3 billion in the first three months of 2022 compared with the same period in 2021 because of weak market sentiment and pandemic-induced disruptions. However, the rating agency expects COLI's contracted sales to pick up gradually throughout 2022, supported by its quality land banks, mostly in first- and second-tier cities across key metropolitan areas in China; solid housing demand in these high-tier cities; and the effect of gradual policy loosening.
Moody's also expects COLI's adjusted net debt/net capitalization to stay at 27%-28% in the next 1-2 years – up slightly from 25% as of 31 December 2021 – because the company will maintain its strong financial discipline while managing its business amid an uncertain market.
COLI's EBIT/interest will also likely fall to around 6.5x in 2022 from 7.2x in 2021 because of slowing revenue growth and margin contraction.
Nevertheless, COLI's key financial metrics continue to reflect its solid credit quality and strongly support its Baa1 issuer rating.
COLI's liquidity remains excellent, underpinned by the company's strong access to funding, in view of its solid credit quality and government background, and its large cash holdings of RMB131 billion, including RM23.5 billion of regulated pre-sales proceeds of properties, as of 31 December 2021.
Moody's expects COLI's cash holding and operating cash flow to fully cover its committed land payments and refinancing needs over the next 12-18 months.
COLI's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because, despite its status as a holding company with most claims at the operating subsidiaries, COLI's creditors benefit from its highly diversified business profile (with cash flow generation across a large number of operating subsidiaries), which mitigates structural subordination risk.
With respect to environmental, social and governance (ESG) factors, Moody's has considered COLI's majority ownership by China State Construction Engineering Corp Ltd (CSCECL, A2 stable), which is under the supervision of and monitored by China's central government; COLI's prudent financial management; the disclosure requirement under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange; and the presence of a board of directors and four special committees to supervise the company's operations.
COLI has prudent financial management, as reflected by its low balance-sheet leverage and excellent liquidity. It has a track record of maintaining its net debt/equity below 40% and cash/total assets above 10% over the cycles. The company also has a stable dividend policy, with payouts at around 30% of net profit, excluding the after-tax gains in the fair value of investment properties, over the past three years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade COLI's rating if the company generates stable and significant recurring income that can act as a buffer against the volatility of its development business; and maintains stable sales growth and low balance-sheet leverage.
Credit metrics indicative of upward rating pressure include adjusted net debt/net capitalization consistently below 25%-30% and EBIT/interest above 7.5x-8.0x.
Moody's could downgrade COLI's rating if the company's sales performance falls below the agency's expectations or it adopts more aggressive growth and land acquisition strategies.
Credit metrics indicative of downward rating pressure include adjusted net debt/net capitalization exceeding 35% and EBIT/interest below 5.5x-6.0x on a sustained basis.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
China Overseas Land & Investment Limited (COLI), which is listed on the Hong Kong Stock Exchange, is a 56.1%-owned subsidiary of China State Construction Engineering Corp Ltd (CSCECL, A2 stable), which is in turn 56.3% owned by China State Construction Engineering Corporation, a central government-owned enterprise under the State Council of China.
As of 31 December 2021, COLI, including its joint ventures and associates but excluding China Overseas Grand Oceans Group Limited (Baa2 stable), had a total land bank of 51 million square meters in gross floor area.
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 entities are participating and the rated entities or their agent(s) generally provide 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.
Kaven Tsang
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
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
