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Rating Action:

Moody's affirms Gemdale's and Famous' ratings; assigns (P)Ba3 rating to Famous' MTN program

07 Jan 2021

Hong Kong, January 07, 2021 -- Moody's Investors Service has affirmed the Ba2 corporate family rating (CFR) of Gemdale Corporation and the Ba3 CFR of its wholly-owned subsidiary, Famous Commercial Limited.

Moody's has also affirmed the Ba3 senior unsecured ratings on the bonds issued by Gemdale Ever Prosperity Investment Limited (Gemdale Ever Prosperity) and guaranteed by Famous.

At the same time, Moody's has assigned a provisional (P)Ba3 senior unsecured rating to the proposed medium-term note (MTN) program of Gemdale Ever Prosperity, based on the unconditional and irrevocable guarantee by Famous.

The proposed MTN program will also be supported by a deed of equity interest purchase undertaking and a keepwell deed between Gemdale, Famous, Gemdale Ever Prosperity and the bond trustee.

The outlooks on all the ratings remain stable.

"The affirmation of Gemdale's ratings reflects our expectation that Gemdale will maintain stable operational growth and credit metrics at levels supportive of its Ba2 rating category over the next 12-18 months," says Danny Chan, a Moody's Assistant Vice President.

Moody's also expects Gemdale will maintain its good liquidity and access to funding, which would give the company financial flexibility against a potential tightening of onshore credit to China's property sector.

"The affirmation of Famous' ratings reflects our expectation that Famous will remain as Gemdale's primary offshore funding platform and continue to receive strong financial support from its parent," says Chan.

RATINGS RATIONALE

Gemdale's Ba2 CFR reflects its established brand name, its long operating track record in China's (A1 stable) property market, and its disciplined and stable management team. The Ba2 CFR also factors in its good liquidity and good access to various funding channels.

However, Gemdale's Ba2 CFR is constrained by its moderating profit margins and significant exposure to its joint venture (JV) projects, which in turn raises its contingent liabilities and lowers its corporate and financial transparency.

Moody's expects Gemdale's debt leverage ratio, as measured by revenue to debt, will recover slightly to 65%-70% in the coming 1-2 years from 58% for the 12 months ended June 2020, driven by an expected recovery in revenue from a weak level in 1H 2020. The revenue growth will more than offset a mild increase in debt to fund its slowing business growth.

Despite the disruptions to sales caused by the coronavirus pandemic in the first half of 2020, the company demonstrated strong sales execution capability, with its gross contracted sales rising 15% to RMB243 billion for 2020 from 2019.

Moody's expects Gemdale's gross contracted sales will grow steadily to about RMB250-270 billion annually in the next 1-2 years from RMB243 billion in 2020 and RMB210 billion in 2019, which will support Gemdale's revenue recognition and cash flow generation over the next 1-2 years.

However, Gemdale's EBIT/interest will decline to around 4.0x over the next 1-2 years from 4.3x for the 12 months ended June 2020, because of a contraction in gross margins.

Moody's expects Gemdale's gross margin will likely fall to around 30%-31% over the next 1-2 years from 39% for the 12 months ended June 2020, in view of the governments' cap on selling prices of new housing and increased land costs in some of the company's major markets.

Nevertheless, Gemdale's financial metrics remain supportive of its Ba2 CFR.

Gemdale's liquidity is good, supported by its strong contracted sales and solid access to funding. As of September 2020, the company's cash holdings of RMB50.5 billion could cover about 1.2x of its short-term debt. Moody's expects the company's cash holdings, together with its contracted sales proceeds after deducting basic operating cash flow items, will fully cover the company's capital spending and refinancing needs over the next 12-18 months.

Meanwhile, Famous' Ba3 CFR reflects its standalone credit profile and a two-notch rating uplift from Gemdale, based on Moody's expectation that Gemdale will provide financial support to its subsidiary in times of stress.

Moody's support assumption considers (1) Gemdale's full ownership of Famous; (2) Famous' status as Gemdale's primary platform to raise funds from the offshore debt capital markets; and (3) Gemdale's track record of providing financial support to Famous.

Famous' standalone credit profile is constrained by the small scale of its operations, its weak financial metrics and potential volatility in its sales performance. However, the standalone credit profile also factors in operational benefits arising from the company's status as a subsidiary of Gemdale, such as cost efficiencies and a strong brand name, and Moody's expectation of an increase in scale over the next 1-2 years as Gemdale injects assets into Famous.

Famous' liquidity is weak. Nonetheless, Moody's expects the company will continue to receive funding support from Gemdale and adequate banking facilities to fund its operations, given its close linkage with Gemdale.

The Ba3 senior unsecured ratings on the bonds and the MTN program guaranteed by Famous are not affected by subordination to claims at the operating companies. This is because Moody's expects support from Gemdale will flow through the holding company rather than directly to its main operating companies, thereby mitigating any differences in expected loss that could result from structural subordination.

Moody's views that the keepwell agreements provide weaker protection to bondholders than explicit guarantees from Gemdale. The enforcement of keepwell agreements could also be subject to extensive legal and procedural uncertainties, particularly because of a lack of legal precedent in China for enforcing such agreements.

In terms of environmental, social and governance (ESG) factors, Moody's has considered Gemdale's track record of disciplined financial management, diversified ownership and board of directors, and its established governance standard, which mitigate the risks brought by its weakened corporate transparency due to the company's high use of JVs.

Moody's has also taken into account Famous' private company status and low corporate transparency. However, Gemdale's 100% ownership of the company, established governance structure and history of providing support to its subsidiary mitigate these risks.

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 ESG framework, given the substantial implications for public health and safety.

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

The stable outlook on Gemdale reflects Moody's expectation that the company will continue to demonstrate financial discipline in managing its business growth and maintain adequate liquidity to meet its working capital and refinancing needs.

Meanwhile, the stable outlook on Famous reflects Moody's expectation that the company's standalone credit profile will remain largely stable and that the likelihood of support from Gemdale will remain intact over the next 12-18 months.

Moody's could upgrade Gemdale's rating if the company (1) successfully implements its business plan to achieve stable sales growth; and (2) strengthens its credit metrics.

Credit metrics indicative of an upgrade include revenue/adjusted debt above 80% and EBIT/interest coverage above 5.0x, both on a sustained basis.

A significant reduction in contingent liabilities associated with its JVs or a reduced likelihood of funding support to its JVs could also lead to an upgrade. This could arise from a reduced use of these JVs or a material improvement in the financial strengths of its JV projects.

Gemdale's Ba2 rating could come under pressure if (1) contracted sales and/or operating cash flows weaken beyond Moody's expectations; or (2) the company materially accelerates its development activities and/or undertakes aggressive land acquisitions, thereby weakening its credit metrics and liquidity position.

Moody's could downgrade the rating if Gemdale's EBIT coverage of interest falls below 3.5x-4.0x or if revenue/adjusted debt declines below 65%-70%, both on a sustained basis.

Downward pressure could also increase if the company's contingent liabilities associated with its JVs or the likelihood of funding support to its JVs increase significantly. This could arise from a material deterioration in the financial strengths and liquidity of its JV projects or a substantial increase in investment in new JV projects.

Meanwhile, Moody's could upgrade Famous' rating if (1) the company improves its scale and diversity, thereby reducing its sales and earnings volatility; and (2) Gemdale's CFR is upgraded.

On the other hand, Famous' rating could come under pressure if (1) Gemdale's rating is downgraded; or (2) Gemdale reduces its ownership of or lowers its support for Famous.

Moody's could also downgrade Famous' rating if the company's credit profile or liquidity deteriorate materially because of a failure to implement its business plan or pursue aggressive expansion.

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.

Incorporated in China and listed on the Shanghai Stock Exchange, Gemdale Corporation is a leading developer in China's residential property sector. As of the end of June 2020, the company's land bank totaled around 59 million square meters (sqm) in saleable gross floor area (GFA) in about 65 cities in China.

Incorporated in Hong Kong in 1995, Famous Commercial Limited is a wholly-owned subsidiary of Gemdale Corporation. The company also serves as Gemdale's funding vehicle in overseas markets.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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.

Danny Chan
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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