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.
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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.
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
