Hong Kong, October 19, 2021 -- Moody's Investors Service has affirmed the B3 corporate family rating
(CFR) of Zhengzhou Zhongrui Industrial Group Co., Ltd.
The outlook has been changed to negative from stable.
"The change in outlook to negative reflects our expectation that Zhengzhou
Zhongrui's contracted sales from its property business will fall
over the next 6-12 months because of weaker consumer sentiment,
which in turn will lead to a deterioration in the company's financial
metrics and liquidity," says Daniel Zhou, a Moody's
Analyst.
"The affirmation reflects Zhengzhou Zhongrui's track record
in managing its operations in both property and coal trading businesses
amid the difficult operating and financing conditions over next 6-12
months," adds Zhou.
RATINGS RATIONALE
Zhengzhou Zhongrui's existing CFR rating reflects the company's
track record in property development in Zhengzhou, Henan province,
China. It also takes into consideration the strengths of its coal
solution business in terms of its scale, its track record in coal
trading, its professional integrated management services and quality
clients, and the risk diversification offered by this business.
However, the rating is constraint by its high debt leverage,
because of the debt-funded growth of its property and coal trading
businesses, as well as high refinancing risks.
Moody's expects Zhengzhou Zhongrui's contracted sales from
its property business will decline over the next 6-12 months,
driven by weaker homebuyer confidence amid tight funding. This
will weaken the company's operating cash flow and in turn its liquidity.
Moody's expects Zhengzhou Zhongrui's liquidity to be weak
over the next 6-12 months. As of 30 June 2021, the
company had unrestricted cash of RMB2.2 billion compared with reported
short-term debt of RMB5.2 billion. Moody's
expects the company will use its internal cash to repay some of its maturing
debt, but the repayment will reduce the funding available for its
operations over the next 12-18 months. The company's financial
flexibility will also be hurt if the weakness in debt capital markets
persists.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered Zhongrui's moderate governance risk, due
to its private company status, with less rigorous corporate governance
requirements when compared with listed companies. Zhongrui's ownership
is also concentrated in its chairman, who owns 70% of the
company. But, this risk is mitigated by the track record
of equity provided by the chairman to support the growth of Zhongrui's
businesses.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade of the rating is unlikely in the near term, given the
negative rating outlook.
However, the rating outlook could return to stable if the company
improves its operating performance and significantly strengthens its liquidity
profile on a sustainable basis.
The rating could be downgraded if the company's liquidity deteriorates
because of a significant decline in contracted sales or cash flow,
or an inability to refinance its maturing debt over the next six to 12
months.
Credit metrics that would indicate a possible downgrade include EBITDA/interest
falling below 1.0x or unrestricted cash/short-term debt
dropping below 35%-50% on a sustained basis.
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.
Zhengzhou Zhongrui Industrial Group Co., Ltd is a privately-owned
enterprise engaged in two major businesses: property development
and coal solutions. At 30 June 2021, the company was 70%
owned by Mr. Wan Wongzing, its founder and chairman,
and 30% by Mr. Liu Yi.
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.
Yiwei Daniel Zhou
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
