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.
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Moody's considers a rated entity or its agent(s) to be participating
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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,
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Please see www.moodys.com for any updates on changes to
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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
