Hong Kong, March 17, 2021 -- Moody's Investors Service has changed the rating outlook on Sunac
China Holdings Limited ("Sunac") to positive from stable.
At the same time, Moody's has affirmed Sunac's Ba3 corporate
family rating (CFR) and B1 senior unsecured debt rating.
"The change in outlook to positive reflects our expectation that Sunac's
debt leverage will improve over the next 12-18 months, driven
by strong revenue growth, controlled land acquisitions and other
investments," says Danny Chan, a Moody's Assistant Vice President
and Analyst.
"We also expect Sunac will continue to exercise prudent financial discipline,
maintain good liquidity and expand its funding access in the next 12-18
months while pursuing balanced growth in its property development and
non-property development businesses," adds Chan.
RATINGS RATIONALE
Sunac's Ba3 CFR reflects the company's large scale and good sales execution,
leading brand and market position and good quality of its land bank.
The rating also considers Sunac's improving debt leverage and good liquidity
profile.
These strengths are counterbalanced by the company's modest interest
coverage, substantial exposure to non-standard borrowings,
and high reliance on sales from its joint ventures (JVs) and associates.
Moody's expects that Sunac's debt leverage, as measured by revenue/adjusted
debt, will improve to 70%-75% in the next 1-2
years from 66.5% in 2020, on the back of robust revenue
recognition from strong contracted sales over the past 2-3 years,
and its disciplined approach to pursuing growth and controlling debt increase.
Moody's believes that Suanc's sizable salable resources, strong
sales execution and solid housing demand in its core markets in China's
Tier 1 and Tier 2 cities will enable the company to maintain stable yearly
contracted sales growth of 5%-10% in 2021-2022.
Its contracted sales grew 3% from the previous year to RMB575.3
billion in 2020 despite the coronavirus outbreak, after recording
a robust annual growth of 21% in 2019 and 27% in 2018.
This growth notably outperformed the national sales growth of 10%
and 15% in 2019 and 2018, respectively.
Moreover, over the past 18 months, Sunac has improved its
financial management with controlled land acquisition expenses and investments,
as well as its capital structures, debt maturity profile and balance
sheet liquidity.
Specifically, Sunac kept its share of annual land acquisitions to
20% of attributable contracted sales in 2020 from 32% a
year ago. It has also accelerated the disposal of some of its non-core
assets to enhance its liquidity and capital structure, such as disposing
its shares in Jinke Property Group Co., Ltd. (B1 stable)
for RMB11 billion in 2020.
Moody's expects Sunac's adjusted EBIT/interest will improve moderately
to 2.7x-2.8x from 2.5x over the next 1-2
years, as the effect of growing revenue and declining interest costs
more than offset an expected decline in gross profit margin. The
company's reported gross profit margin will continue to moderate to around
20% in the next 12-18 months from 21% in 2020 and
24% in 2019, due to rising land costs and regulatory measures
on property prices in its core markets, such as Hangzhou,
Chongqing, Shanghai and Suzhou.
Sunac plans to continue to expand its onshore bond financing and bank
credit facilities to lower its reliance on high-cost non-standard
funding sources. Nevertheless, because of the time the company
needs to improve its financing structure, Moody's expects
its non-standard borrowings will continue to account for a significant
portion of its total debt in the next 6-12 months.
Sunac's liquidity is good. The company's cash balance of RMB133
billion (including restricted cash of RMB34 billion) covered 1.44x
of its short-term debt as of December 2020. Moody's expects
the company's cash holdings, together with expected operating cash
flow, will be able to cover its maturing short-term debt,
committed land purchases, dividend payments, and capital spending
and payables for its previous acquisitions over the next 12-18
months.
Sunac's CFR also considers the company's concentrated ownership
and its significant investments in JVs, as well as its elevated
leverage stemming from its aggressive debt-funded expansion in
2016-2019 and high exposure to non-standard borrowings.
Nevertheless, Moody's has noted the company's disciplined
financial policy over the past 12 months, with its (1) prudent land
acquisition strategy and controlled debt growth, (2) improved liquidity
management and maturity profiles, and (3) enhanced capital structure
and access to funding.
The B1 senior unsecured debt rating is one notch lower than the CFR because
of structural subordination risk. Most of Sunac's claims are at
the operating subsidiary level and have priority over claims at the holding
company in a liquidation scenario. In addition, the holding
company lacks significant mitigating factors for structural subordination.
Consequently, the expected recovery rate for claims at the holding
company is lower.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Sunac establishes a track record of maintaining
good liquidity and a prudent investment strategy, and continues
to reduce its exposure to non-standard borrowings while pursuing
stable growth in its property development and non-property development
businesses. Credit metrics indicative of an upgrade include adjusted
revenue/debt above 70%-75% and adjusted EBIT/interest
above 3.0x-3.5x, both on a sustained basis.
A significant reduction in the contingent liabilities associated with
its JVs or a lower likelihood of providing funding support to its JVs
could also be positive to the ratings.
On the other hand, Moody's could change the outlook to stable if
it is unlikely the company's performance and credit metrics will fall
within the parameters required for an upgrade over the next 12-18
months.
Downward rating pressure could also increase if the contingent liabilities
associated with its JVs or the likelihood of providing funding support
to its JVs increases significantly.
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.
Sunac China Holdings Limited, which was listed on the Hong Kong
Stock Exchange in 2010, is an integrated residential and commercial
property developer with projects in China's main economic regions.
The company develops a diverse range of properties, including high-rise
and mid-rise residences, detached villas, townhouses,
retail properties, offices and car parks.
As of the end of December 2020, Sunac's land bank by attributable
gross floor area in China, including those of its joint ventures
and associates, was 161 million square meters. Its revenue
was RMB230.6 billion ($35.5 billion) in 2020.
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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
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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.
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