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Rating Action:

Moody's affirms Longfor's Baa2 ratings; outlook stable

 The document has been translated in other languages

12 Apr 2022

Hong Kong, April 12, 2022 -- Moody's Investors Service has affirmed Longfor Group Holdings Limited's Baa2 issuer and senior unsecured ratings.

The outlook remains stable.

"The rating affirmation reflects our expectation that Longfor will have solid credit metrics and strong liquidity to withstand the headwinds facing the China property sector and that the company's growing recurring rental income will provide a financial buffer over the next 1-2 years," says Kaven Tsang, a Moody's Senior Vice President.

"The stable outlook reflects our expectation that Longfor will maintain its solid credit metrics, disciplined financial management and access to multiple sources of funding," adds Tsang.

RATINGS RATIONALE

Longfor's Baa2 issuer rating reflects the company's strong brand name, diversified geographic coverage, strong liquidity and track record of resilient sales growth through cycles. The company's growing investment property portfolio will also increase its recurring rental income and, in turn, support its cash flow stability and profitability.

Longfor's strategy of growing its residential development and property investments exposes the company to industry cyclicality and execution risks, in addition to its persistent funding needs. In particular, the current downturn in the property market and tight funding conditions add to the challenges. However, the company's disciplined and prudent approach to financial management, growing recurring cash flow and good access to funding with low funding costs provide it with a buffer against the concerns.

Moody's expects the company's gross contracted sales to decline around 10% to about RMB260 billion in 2022 and around 5% to about RMB250 billion in 2023 due to weak market conditions.

Nevertheless, Longfor's financial metrics will remain solid. Moody's expects the company's revenue/adjusted debt and EBIT/interest coverage to remain strong at around 110% and at around 5.5x, respectively, in the next 1-2 years, from around 107% and 5.7x in 2021, as mild revenue growth will partly offset the effect of moderate margin contraction. Longfor will also control its debt growth amid uncertain operating and funding conditions.

In addition, Longfor's growing recurring rental income will enhance the company's cash flow stability and improve its debt-servicing ability. Moody's forecasts Longfor's rental income/interest coverage will strengthen to 145%-165% in the next 1-2 years from 119% in 2021. These metrics position the company appropriately at the Baa2 issuer rating, and reflect Moody's expectation that Longfor's operating performance will be more resilient than most of its Chinese property peers'.

Moody's expects Longfor's liquidity to remain excellent, underpinned by its prudent liquidity management and good access to multiple sources of funding. The company's internal resources, including unrestricted cash and operating cash flow, will fully cover its committed expenditures and refinancing needs in the next 12-18 months. The company's unrestricted cash/short-term debt ratio improved to 6.1x as of the end of 2021 from the 5.2x as of the end of June 2021 and 4.2x as of the end of 2020.

Longfor's issuer and senior unsecured ratings are not affected by subordination to claims at the operating company level. This is because, despite its status as a holding company with a majority of claims at the operating subsidiaries, Longfor's creditors benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries and different business segments in property development, retail mall and apartment leasing. Such business diversification mitigates the structural subordination risk.

In terms of governance factors, Moody's has taken into account Longfor's concentrated ownership by its key shareholder, Madam Cai Xinyin, the daughter of the chairwoman, who held a total 42.63% stake in the company as of February 2022. Moody's has also considered the company's track record of maintaining prudent financial management, as indicated by its stable net debt/equity of 45%-55%, the presence of an established management team, four independent nonexecutive directors on its eight-member board of directors, and by other internal governance structures and disclosure standards as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.

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

The rating could be upgraded if Longfor strengthens its operating and financial profile; maintains strong liquidity and disciplined financial management; develops a stronger institutional corporate governance framework and standards that are line with those of companies with diversified ownership; and is able to withstand the risk of changes in ownership or key personnel.

The rating could be downgraded if there is a significant deterioration in the company's contracted sales, profitability or liquidity; or the company pursues an aggressive debt-funded expansion that weakens its credit metrics, such that revenue/adjusted debt falls below 85%-90%, EBIT/interest coverage decreases below 5.0x-5.5x or recurring rental income/interest coverage falls below 95%-100%, all on a sustained basis.

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.

Longfor Group Holdings Limited (Longfor) is a leading developer in China's residential and commercial property development sector. Founded in 1993, the company began its business in Chongqing and has established a solid brand name in the Chongqing municipality. As of December 2021, Longfor had a total land bank of 73.5 million square meters in gross floor area, spanning 69 cities in five major economic regions in China.

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 entity is participating and the rated entity or its agent(s) generally provides 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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.

Kaven Tsang
Senior Vice President
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.
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