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Rating Action:

Moody's assigns B1 to Central China Real Estate's proposed USD bonds

15 Apr 2019

Hong Kong, April 15, 2019 -- Moody's Investors Service has assigned a B1 senior unsecured rating to the proposed USD bonds to be issued by Central China Real Estate Limited (CCRE, Ba3 stable).

CCRE will use the proceeds from the proposed bonds to refinance existing debt.

RATINGS RATIONALE

"The proposed bonds — which will be mainly used for debt refinancing — will not have a material impact on CCRE's credit metrics, but they will improve the company's liquidity and debt maturity profile," says Kaven Tsang, a Moody's Senior Vice President and also the Lead Analyst for CCRE.

CCRE's Ba3 corporate family rating (CFR) reflects its leading market position and long operating track record in Henan Province. The rating also takes into consideration the company's track record of achieving stable growth in contracted property sales over the past five years.

At the same time, the CFR reflects CCRE's geographic concentration in Henan Province that will expose it to potential volatility in the province's economy, as well as any changes in the local government's regulatory restrictions on property purchases and construction activities. Its high level of exposure to joint ventures will also raise contingent liabilities.

Moody's expects CCRE's contracted sales will grow to around RMB60-70 billion in the next 12-18 months after registering strong 76.5% year-on-year growth to RMB53.7 billion in 2018. In the first three months of 2019, the company's contracted sales remained robust with a 44.4% year-on-year increase to RMB8.2 billion.

The solid sales performance will support the company's revenues and EBIT growth in the next 12-18 months, which will partly mitigate in turn the effect of rising debt to fund its fast-growth plan.

Moody's expects CCRE's revenue/adjusted debt, including from its shares in joint ventures, to improve to around 80% over the next 12-18 months from Moody's estimates of 64% in 2018.

Moody's also expects adjusted EBIT/interest, including from its shares in joint ventures, to improve to 3.0x-3.5x in the next 12-18 months, compared to Moody's estimates of 3.0x for 2018.

CCRE's revenue/adjusted debt ratio, including from its shares in joint ventures, fell to 64% in 2018 from 96.7% in 2017 as the company raised debt at both the consolidated level and at joint ventures to support its fast growth in contracted sales. However, the growth in contracted sales will only be reflected in revenues in the next 1-2 years.

Meanwhile, CCRE's EBIT/interest, including from its shares in joint ventures, rose slightly to 3.0x in 2018 from 2.8x in 2017, as the sharp improvement of its gross margin to 34.4% in 2018 from 23.6% in 2017 more than offset the increase in interest expenses.

Moody's expects CCRE will maintain adequate liquidity. CCRE reported unrestricted cash totaling RMB14.2 billion at the end of 2018. Adjusted cash/short-term debt — including amounts due to and from its joint ventures — was at 134% at the same time.

The B1 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk.

This risk reflects the fact that the majority of claims are at its operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination.

As a result of these factors, the expected recovery rate for claims at the holding company will be lower.

The stable rating outlook reflects Moody's expectation that CCRE can maintain (1) its leadership position in Henan Province and generate sales growth; (2) adequate liquidity levels; and (3) a disciplined approach to land acquisitions.

An upgrade could occur if CCRE (1) consistently achieves its sales targets; (2) demonstrates a track record of good financial discipline by keeping adjusted cash/short-term debt above 2.0x, adjusted revenue/debt above 90%, and adjusted EBIT/interest above 4.0x, all on a sustained basis (the ratios are adjusted for its joint-venture financials); and (3) broadens its geographic coverage in a disciplined manner and strengthens its offshore banking relationships.

The ratings could come under downward pressure if (1) CCRE experiences a significant declines in sales; (2) the company suffers a material decline in its profit margins; (3) CCRE accelerates its expansion, such that its liquidity position deteriorates or its debt levels rise materially, or both; or (4) construction stoppages become more frequent and the company is unable to make up for the lost time and misses deadlines on project deliveries.

Specific indicators for a downgrade include (1) adjusted cash/short-term debt below 1.0x-1.5x; (2) adjusted EBIT/interest consistently below 2.5x-3.0x; or (3) adjusted revenue/debt below 70%-75% on a sustained basis. The ratios are adjusted for its joint-venture financials.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Central China Real Estate Limited is a leading property developer in Henan Province, with a land bank of 34.66 million square meters in attributable gross floor area at the end of 2018. It was founded in 1992 and listed on the Hong Kong Stock Exchange in June 2008.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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.

Kaven Tsang
Senior Vice President
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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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