Hong Kong, October 19, 2021 -- Moody's Investors Service has changed the rating outlook on Shimao Group
Holdings Limited (Shimao) to stable from positive.
At the same time, Moody's has affirmed Shimao's Ba1 corporate family
rating (CFR).
"The change in outlook to stable reflects our expectation that Shimao's
credit metrics will likely not meet the thresholds required for a rating
upgrade, given the challenging operating and funding conditions,"
says Celine Yang, a Moody's Vice President and Senior Analyst.
"The rating affirmation reflects our expectation that Shimao will
have adequate liquidity to temper the risks associated with the difficult
operating and financing conditions over the next 6-12 months,"
adds Yang.
RATINGS RATIONALE
Shimao's Ba1 CFR reflects its (1) strong sales execution through the property
cycles, (2) good geographic coverage and product mix with diversified
land reserves, (3) large operating scale and status as a top developer
in China in terms of contracted sales, and (3) good liquidity and
access to domestic and offshore funding. The CFR also reflects
Shimao's growing income from its non-property development business
and its portfolio of quality investment properties and hotels.
On the other hand, the rating is constrained by the company's moderate
credit metrics, execution risk associated with its fast expansion
in its non-property development business and ongoing funding needs
associated with its business growth.
Moody's forecasts that Shimao's contracted sales will decline
over the next 6-12 months, driven by weaker homebuyer confidence
amid tight funding conditions. The company's 3Q2021 contracted
sales fell 24% year-on-year, compared with
a 38% increase in the first six months in 2021. The slowdown
in contracted sales will weaken the company's operating cash flow
and in turn its liquidity.
However, Moody's expects Shimao's liquidity to be adequate
over the next 6-12 months. As of 30 June 2021, the
company had unrestricted cash of RMB74.8 billion, compared
with reported short-term debt of RMB44.5 billion.
Moody's expects Shimao's leverage, as measured by revenue/adjusted
debt, will trend toward 83%-88% over the next
12-18 months, up from 79% for the 12 months ended
June 2021. This improvement will be supported by mild debt growth
and revenue growth following strong contracted sales in the past 1-2
years.
Meanwhile, its interest coverage, as measured by EBIT/interest,
will remain at around 4.0x over the next 12-18 months,
compared to 4.0x for the 12 months ended June 2021. These
credit metrics appropriately position the company at the Ba1 CFR.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered Shimao's prudent financial management, which
has resulted in its stable financial profile. Moody's has also
considered the company's concentrated ownership by its key shareholder,
Mr. Hui Wing Mau, who held a 65% stake as of 30 June
2021.
Moody's has also considered the company's established internal governance
structures and standards, as required by the Corporate Governance
Code for companies listed on the Hong Kong Stock Exchange. In particular,
it has three independent non-executive directors (INEDs) on its
eight-member board, and its board has established three committees
with specific written terms of reference to oversee particular aspects
of the company's affairs. All three committees are composed of
INEDs only.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade Shimao' ratings if the company (1) sustains its
sales growth and profit margins while demonstrating strong financial discipline;
(2) maintains strong liquidity, such that its unrestricted cash/short-term
debt exceeds 150%; and (3) improves its credit metrics,
such that its adjusted EBIT/interest coverage rises above 4.5x-5.0x
and its revenue/adjusted debt exceeds 90%-95% on
a sustained basis.
On the other hand, Moody's could downgrade Shimao's rating
if (1) the company pursues aggressive land acquisition or investments
to support its business growth; (2) its credit metrics weaken,
with its EBIT/interest coverage falling below 3.5x-4.0x
and its revenue/adjusted debt falling below 75%-80%,
all on a sustained basis; or (3) its liquidity weakens, as
reflected by its cash/short-term debt falling below 125%.
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.
Shimao Group Holdings Limited is a Chinese property developer that was
listed on the Hong Kong Stock Exchange in July 2006. It develops
residential properties and owns a portfolio of investment properties,
including hotels. As of the end of June 2021, the company,
together with its 64%-owned Shanghai A-share listed
subsidiary, Shanghai Shimao Co., Ltd.,
held an attributable land bank of 44.2 million square meters (sqm)
in China. Shanghai Shimao mainly develops commercial properties.
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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YuYing (Celine) Yang
Vice President - 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
