Hong Kong, September 05, 2022 -- Moody's Investors Service has affirmed the Ba2 corporate family rating (CFR) of Gemdale Corporation and the Ba3 CFR of the company's wholly-owned subsidiary, Famous Commercial Limited.
Moody's has also affirmed the Ba3 senior unsecured rating on the bonds and the (P)Ba3 senior unsecured rating on the medium-term note (MTN) program issued by Gemdale Ever Prosperity Investment Limited (Gemdale Ever Prosperity) and guaranteed by Famous. Gemdale Ever Prosperity's offshore bonds are supported by Gemdale through keepwell deeds and deeds of equity interest purchase undertaking.
At the same time, Moody's has revised the outlook of all entities to negative from stable.
"The negative outlook reflects Gemdale's weaker-than-expected contracted sales amid difficult operating conditions, as well as weakening funding access to open markets, which lowers its financial flexibility," says Kelly Chen, a Moody's Vice President and Senior Analyst.
"The rating affirmation reflects our expectation that Gemdale will maintain good liquidity and a disciplined approach to its business and financial management," adds Chen.
RATINGS RATIONALE
Gemdale's Ba2 CFR reflects its established brand name, its long operating track record in China's property market, and its disciplined and stable management team, as well as its good liquidity.
However, Gemdale's Ba2 CFR is constrained by its modest financial metrics and significant exposure to its joint venture (JV) projects, which lowers the transparency of its credit metrics.
Gemdale's year-to-date contracted sales were lower than Moody's previous expectation due to prolonged market weakness. Moody's now forecasts Gemdale's contracted sales will decline to around RMB220 billion and RMB200 billion for 2022 and 2023, respectively, versus Moody's previous expectation of around RMB230 billion and RMB245 billion. The company's contracted sales fell 37% in the first seven months of 2022 compared with the same period in the prior year due to weak market sentiment and COVID-led disruptions. The drop in contracted sales will weaken the company's financial profile and reduce its operating cash flow.
That said, Moody's expects Gemdale's liquidity to remain good. Its unrestricted cash of RMB56 billion as of the end of June 2022 and projected operating cash flow will be sufficient to cover its maturing debt, including more than RMB20 billion of onshore bonds becoming mature or puttable before the end of 2023. However, the use of internal resources to repay maturing debt could continue to reduce its liquidity buffer over time.
Gemdale has issued onshore debt instruments of around RMB2.5 billion in for the year to date, according to its 2022 interim report. However, Moody's sees increasing uncertainties for Gemdale to consistently issue long-term unsecured bonds in meaningful amounts over the next 6-12 months, as market dynamics have further weakened over the past several months.
Meanwhile, Moody's projects Gemdale's credit metrics will remain modest over the next 12-18 months. Gemdale's revenue is likely to decrease by 5%-10% annually for 2022 and 2023 compared with a 6% decline for the last 12 months ended June 2022. Moody's forecasts its gross margin will reduce to 19% for 2022 and 2023, from 22% for the last 12 months ended June 2022 and 20% for 2021, as the company will need to offer price discounts to support contracted sales and cash collection.
Moody's also expects the company to reduce its debt level and operating expenses amid slowing land acquisitions and a tight credit environment. As a result, Moody's forecasts Gemdale's debt leverage, as measured by revenue/adjusted debt, will weaken to 70% over the next 12-18 months compared with 76% for 2021, and its EBIT/interest coverage, will stay at around 2.8x over the same period. These ratios will position the company at the weaker end of its Ba2 CFR.
Meanwhile, Famous' Ba3 CFR reflects its standalone credit profile and a two-notch rating uplift, based on Moody's expectation that Gemdale will provide financial support to Famous 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 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 core subsidiary of Gemdale, such as cost efficiencies and a strong brand name.
Famous' liquidity is weak. Nonetheless, Moody's expects the company will continue to receive funding support from Gemdale and have adequate banking facilities to fund its operations, given its close linkage with Gemdale.
The Ba3 senior unsecured ratings on the bonds and the (P)Ba3 senior unsecured rating on 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.
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 standards, 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely in the near term, given the negative outlook.
However, Moody's could revise Gemdale's rating outlook to stable if the company strengthens its access to long-term funding, improves sales and financial metrics, and maintains sufficient liquidity.
A significant reduction in contingent liabilities associated with its JVs or a reduced likelihood of funding support to its JVs could also be positive for the rating.
However, Gemdale's rating could be downgraded if (1) its 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 3.0x-3.5x 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 increases significantly.
Meanwhile, Famous' rating outlook could return to stable if Gemdale's outlook is revised to stable.
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 deteriorates materially because of a failure to implement its business plan or if it pursues aggressive expansion.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.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 2022, the company's land bank totaled around 62 million square meters (sqm) in saleable gross floor area (GFA) across about 78 cities in China.
Incorporated in Hong Kong SAR, China 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 on https://ratings.moodys.com/rating-definitions.
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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.
Chen Chen
Vice President - Senior 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
