Hong Kong, May 12, 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 ratings 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. Famous's offshore bank loans and offshore bonds are supported by Gemdale through keepwell deeds and deeds of equity interest purchase undertaking.
The rating outlook remains stable.
"The affirmation of Gemdale's CFR reflects our expectation that the company will maintain its disciplined financial management, good liquidity and continued access to funding that would give the company financial flexibility to weather the difficult operating and funding environments of China's property sector," says Kelly Chen, a Moody's Vice President and Senior Analyst.
"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 Gemdale," says 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. 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 modest financial metrics and significant exposure to its joint venture (JV) projects, which lowers transparency of its credit metrics.
Moody's expects Gemdale's interest servicing ability, as measured by EBIT interest coverage, to improve to 3.0x-3.5x over the next 12-18 months after declining to 2.9x in 2021 from 4.8x in 2020. This is because its revenue growth, supported by strong contracted sales in the previous 2-3 years, will more than offset an expected slight decrease in profit margins over the next 12-18 months. Gemdale's gross profit margin fell to 20% in 2021 from 32% in 2020. Moody's also expects the company to reduce its debt level amid slowing land acquisitions and a tight credit environment. The projected financial metrics remain appropriate for the company's Ba2 CFR.
Moody's forecasts Gemdale's contracted sales will moderate to around RMB245 billion in 2022 as operating conditions in China's property market will remain challenging over the next 6-12 months. Gemdale's contracted sales decreased 42% year-over-year in the first four months of 2022 to RMB58 billion, following an 18% year-over-year growth in 2021.
Nevertheless, Gemdale's liquidity position will remain good thanks to its strong access to onshore funding. The rating agency expects Gemdale's unrestricted cash holdings, together with its operating cash flow, to cover its maturing debt, committed land premiums and dividends over the next 12-18 months.
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
The stable outlook on Gemdale reflects Moody's expectation that the company will continue to demonstrate financial discipline in managing its business profile and maintain good 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 improves its profit margin, maintains a strong financial discipline, and strengthens its financial position. Credit metrics indicative of an upgrade include revenue/adjusted debt above 80% and EBIT/interest coverage above 4.5x-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 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, 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 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://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 December 2021, the company's land bank totaled around 64 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
VP-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