Hong Kong, December 02, 2020 -- Moody's Investors Service has today affirmed Hopson Development Holdings
Limited's ("Hopson") B2 corporate family rating (CFR).
The outlook remains stable.
"The affirmation of Hopson's CFR reflects our expectation that the company
will maintain adequate liquidity and gradually improve its high debt leverage
in the next 12-18 months while continuing its debt-funded
expansion," says Danny Chan, a Moody's Assistant Vice President.
RATINGS RATIONALE
Hopson's B2 CFR reflects the company's (1) strong brand name and
good operating track record in its main operating regions, (2) sizable
land bank, which focuses on tier 1 and tier 2 cities, and
(3) recurring income streams from its high-quality investment properties.
On the other hand, the CFR is constrained by Hopson's high leverage
due to its debt-funded expansion. The rating also factors
in financial risks associated with its fast-growing equity investment
portfolio, which has increased substantially to RMB17 billion at
the end of June 2020 from RMB4 billion at the end of 2019. This
new equity investment segment, which the company includes as one
its major business units this year, has consumed sizable capital
and added uncertainty around its cash flow stability, despite the
significant unrealized returns it achieved in 1H 2020.
Moody's expects Hopson's debt leverage ratio, as measured
by revenue (excluding revenue from the equity investment segment) to debt,
will recover gradually to 25%-30% in the coming 12-18
months from the weak level of 20% for the 12 months ended June
2020, as strong contracted sales support its revenue growth,
which will outpace its debt growth.
Hopson's EBIT/interest (excluding EBIT from the equity investment
segment), on the other hand, will likely soften to 2.1x-2.2x
in the next 12-18 months from 2.3x for the 12 months ended
June 2020, as profits margins decline from the current high level
amidst the company's fast expansion. Nevertheless,
its interest coverage remains appropriate for its B2 CFR.
The company's reported debt increased by approximately 50%
in the first half of 2020 to HKD96 billion because of increased land acquisition
and equity investment. Although Hopson will continue to have debt-funding
needs in the next 1-2 years, Moody's expects its debt
growth will slow as a result of the current tight regulations on funding
to developers in China.
At the same time, Moody's expects Hopson's gross contracted sales
growth to remain strong in the next 12-18 months, reaching
RMB30-35 billion in 2020 and RMB40-45 billion in 2021 from
RMB21 billion in 2019, supported by its high-quality land
reserves and improved asset turnover. Hopson's contracted sales
rose to RMB24.3 billion in the 10 months ended October 2020,
a 28% increase from the year-ago period, following
strong increases of 42% and 63% in 2019 and 2018,
respectively. The company's strong sales growth will continue
to support revenue growth and cash flow generation over the next 12-18
months.
In addition, Hopson's sizable investment property portfolio
and high-quality land banks will provide the company with good
financial flexibility to execute its business expansion as compared to
many of its B-rated property peers.
Moody's expects Hopson's rental income from its investment
properties to remain stable, with adjusted rental income/interest
coverage of around 0.5x-0.6x in the next 12-18
months, which partly buffers the volatility of its property development
sales and improves its debt-servicing ability.
Hopson's liquidity is adequate. Moody's expects that Hopson's
cash holdings, together with its operating cash flow after deducting
basic cash flow items, will be sufficient to cover its maturing
debt, committed land payments and dividend payments over the next
12-18 months.
Hopson's B2 CFR takes into account the company's ownership, which
is concentrated in its key shareholder, Chu Mang Yee, who
held a 55.22% stake in the company as of the end of June
2020. This risk is mitigated by (1) the company's internal governance
structures and disclosure standards, as required under the Corporate
Governance Code for companies listed on the Hong Kong Stock Exchange,
and (2) its Audit, Remuneration and Nomination Committees,
with the first two chaired by independent non-executive directors
(INEDs) and its Audit Committee comprising solely of INEDs.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook on the rating reflects Moody's expectation that,
over the next 12-18 months, Hopson will be able to sustain
its improved sales execution and stable rental income while maintaining
adequate liquidity.
Moody's could upgrade Hopson's rating if the company grows
its scale, improves its liquidity and strengthens its financial
profile, such that adjusted EBIT/interest (excluding EBIT from the
equity investment segment) remains above 2.5x while rental income/interest
stays above 0.6x on a sustained basis.
However, Moody's could downgrade Hopson's rating if
(1) its liquidity deteriorates, reflected by declining cash or rising
short-term debt levels, (2) the company's contracted
sales and profit margins undergo a material decline, and (3) its
financial profile weakens, with adjusted EBIT/interest (excluding
EBIT from the equity investment segment) falling below 1.5x-2.0x
and rental income/interest declining below 0.3x.
The principal methodology used in this rating 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.
Hopson Development Holdings Limited (Hopson) primarily develops residential
properties in cities such as Guangzhou, Beijing, Shanghai,
Tianjin and Huizhou, as well as their surrounding areas.
The company had a land bank of 31.70 million square meters (sqm)
in gross floor area as of the end of June 2020.
Hopson was listed on the Hong Kong Stock Exchange in 1998. The
company's former chairman, Chu Mang Yee, owned a 55.22%
stake in the company as of the end of June 2020. Its revenue for
2019 was HKD18.6 billion.
REGULATORY DISCLOSURES
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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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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
