Hong Kong, October 18, 2021 -- Moody's Investors Service has affirmed the B1 corporate family rating
(CFR) of Zhongliang Holdings Group Company Limited (Zhongliang).
At the same time, Moody's has changed the outlook to stable
from positive.
"The change in outlook to stable reflects our expectation that Zhongliang's
credit metrics will likely not meet the thresholds required for a rating
upgrade, given the challenging operating and funding conditions,"
says Cedric Lai, a Moody's Vice President and Senior Analyst.
"The rating affirmation reflects our expectation that Zhongliang will
have adequate liquidity to temper the risks associated with the difficult
operating and financing conditions over the next 6-12 months,"
adds Lai.
RATINGS RATIONALE
Zhongliang's B1 CFR reflects the company's (1) recognized brand name in
second-tier and lower-tier cities in the Yangtze River Delta
region; (2) strong sales execution, as reflected by its rapid
annual contracted sales growth in the past three years; and (3) solid
credit metrics and adequate liquidity.
However, the company's credit profile is constrained by its relatively
high exposure to lower-tier cities and reliance on non-bank
financing. In addition, the company has a material exposure
to joint venture (JV) businesses, which hinders the transparency
of its credit metrics.
Moody's expects Zhongliang's contracted sales will fall over
the next 6-12 months, driven by weaker homebuyer confidence
amid tight funding conditions. This will weaken the company's
operating cash flow and in turn its liquidity.
Moody's expects Zhongliang's liquidity to be adequate over
the next 6-12 months. As of 30 June 2021, the company
had unrestricted cash of RMB28.2 billion, compared with reported
short-term debt of RMB23.3 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.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the risk associated with the ownership concentration
in Zhongliang's controlling shareholders, Mr. Yang Jian and
his spouse, who together held a 82.9% stake as of
30 June 2021.
Moody's has also considered (1) the presence of three independent non-executive
directors on a board of seven directors, and two independent non-executive
directors who chair the audit and remuneration committees, respectively,
and (2) the company's moderate 30%-40% dividend payout
ratio over the past two years; (3) the application of the listing
rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance
in Hong Kong.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade the CFR if Zhongliang (1) diversifies its funding
channels and reduces the proportion of its trust financing; (2) continues
to executes its business plans and expands; (3) strengthens its liquidity;
(4) sustains its credit metrics, including adjusted EBIT/interest
rising above 3.0x and revenue/adjusted debt exceeding 80%
on a continued basis.
On the other hand, Moody's could downgrade the ratings if Zhongliang:
(1) generates weak contracted sales; (2) suffers from a material
decline in its profit margins; (3) experiences an impairment in its
liquidity position, such that unrestricted cash/short-term
debt falls below 1.0x; and/or (4) materially increases its
debt leverage.
Credit metrics indicative of a downgrade include EBIT/interest coverage
falling below 2.0x and/or adjusted revenue/debt falling below 55%-60%
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.
Zhongliang Holdings Group Company Limited is a Shanghai-based residential
property developer. The company engages in real estate development
in China. The Yangtze River Delta region contributed around 65%
of the company's contracted sales in 2020.
As of 30 June 2021, Zhongliang was 82.9% owned by
its chairman, Mr. Yang Jian, and his spouse,
who act in concert.
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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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
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Cedric Lai
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
