Hong Kong, November 02, 2020 -- Moody's Investors Service ("Moody's") has affirmed the B2 corporate
family rating (CFR) and the B3 senior unsecured rating of Modern Land
(China) Co., Limited ("Modern Land").
The outlook on the rating is stable.
"The ratings affirmation reflects our expectation that the company
will continue to moderately grow its contracted sales, and maintain
its good cash collection and adequate liquidity over the next 12-18
months," says Celine Yang, a Moody's Assistant
Vice President and Analyst.
RATINGS RATIONALE
Modern Land's B2 CFR reflects the company's (1) niche in marketing
and selling comfortable and eco-friendly homes; (2) demonstrated
execution ability; and (3) adequate liquidity.
On the other hand, the company's rating is constrained by
its improving but still low gross profit margins and modest financial
metrics, largely stemming from its debt-funded growth and
high finance costs.
Moody's expects Modern Land will achieve stable annual sales growth
of 5%-10% to RMB40 billion-RMB45 billion over
the coming 12-18 months, up from RMB36.2 billion in
2019. This growth will be underpinned by its sizable saleable resources
of RMB179.7 billion and track record of sales execution.
Modern Land grew its contracted sales by around 7% year-on-year
to RMB26.9 billion for the first nine months of 2020 despite the
coronavirus disruptions, slightly outperforming the national sales
growth of 6.2% over the same period.
Moody's expects Modern Land's debt leverage, as measured
by revenue/adjusted debt, will slightly worsen to about 60%-70%
in the next 12-18 months from 75% for the 12 months ended
June 2020, as Modern Land's debt growth outpaces revenue growth
amid its debt-funded business expansion and sluggish contracted
sales in 2019. Similarly, the company's EBIT/interest
coverage will edge down to 1.9x-2.0x from 2.2x
over the same period, because EBIT growth will be offset by increased
interest expenses driven by higher debt. Such credit metrics remain
appropriate for its ratings.
In terms of environmental, social and governance (ESG) factors,
Moody's has taken into consideration the concentrated ownership by Modern
Land's founder and chairperson, Mr. Zhang Lei, who
held an approximate 65.8% stake in the company as of the
end of June 2020. Such concentrated ownership is counterbalanced
by the company's established governance structures and standards as required
by the relevant code for companies listed on the Hong Kong Stock Exchange.
Furthermore, the company has three special committees in place,
an audit committee, remuneration committee and nomination committee,
two of which are chaired and dominated by the company's independent non-executive
directors.
Moody's regards the impact of the deteriorating global economic outlook
amid the rapid and widening spread of the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety.
Modern Land's liquidity is adequate. Moody's expects
the company's cash holdings, along with its cash flow from
operating activities, will be sufficient to cover its committed
land premium and maturing debt over the next 12 months. The company's
cash holdings of RMB11.7 billion (including restricted cash) as
of 30 June 2020 covered 1.5x of its total short-term debt
of RMB7.8 billion as of the same date.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Modern Land
will achieve stable sales growth while maintaining modest credit metrics
and adequate liquidity in next 12-18 months.
Moody's could upgrade Modern Land's ratings if the company (1) grows its
scale and improves its profit margins; (2) maintains a reasonable
cash balance, with cash/short-term debt above 1.5x;
(3) maintains strong financial discipline in its land acquisitions,
with EBIT/interest coverage above 2.5x-3.0x and revenue/adjusted
debt above 70%-75%, both on a sustained basis;
and (4) reduces its exposure to non-standard borrowings.
Moody's could downgrade Modern Land's ratings if (1) the company's liquidity
and ability to generate operating cash flow fall below Moody's expectations
because of declining contracted sales and aggressive land acquisitions;
(2) the company's revenue recognition is slower than expected, or
its profit margins decline further, leading to further weakness
in its interest coverage and financial flexibility; or (3) the company
engages in material debt-funded acquisitions.
Metrics indicative of a potential downgrade include Modern Land's cash
balance, both restricted and unrestricted, falling below 100%
of short-term debt or the company's EBIT/interest coverage falling
below 1.5x 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.
Modern Land (China) Co., Limited was founded in 2000 in Beijing
by real estate developer Mr. Zhang Lei, who is the company's
current chairman. The company specializes in developing green housing
units, and is one of the few early leaders in China's green and
eco-friendly lifestyle market.
Modern Land was listed on the Hong Kong Stock Exchange in July 2013.
As of June 2020, the company had a gross land bank of around 12.4
million square meters in terms of gross floor area.
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
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Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
YuYing (Celine) Yang
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
