Hong Kong, August 05, 2020 -- 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 its existing
medium to long-term offshore debt, which is due within one
year.
RATINGS RATIONALE
"CCRE's Ba3 corporate family rating (CFR) reflects its leading
market position and long operating track record in Henan province,
its growing contracted sales over the past 2-3 years and its adequate
liquidity," says Kaven Tsang, a Moody's Senior Vice
President.
"At the same time, CCRE's CFR is constrained by its geographic
concentration in Henan province, the execution risks and funding
needs associated with the company's fast-growth sales plan,
and its high exposure to joint ventures (JVs)," adds Tsang.
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.
Moody's expects CCRE's revenue/adjusted debt to remain at 70%-75%
and EBIT/interest at 2.5x-3.0x in the next 12-18
months, appropriately positioning the company's CFR at the
Ba3 rating level.
Moody's expects the company's contracted sales (heavy assets) to
grow modestly to around RMB80 billion in the next 12-18 months
from RMB71.8 billion in 2019, supported by its strong brand
and execution abilities, as well as the solid housing demand in
its home markets. Such growth will support the company's
future revenue growth and liquidity. In the first six months of
2020, CCRE's contracted sales (heavy assets) grew by 8.5%
to RMB30 billion compared to the same period last year, despite
the disruptions from the coronavirus outbreak.
CCRE has good liquidity, as reflected in its unrestricted cash of
RMB22.7 billion at 31 December 2019. Its adjusted cash/short-term
debt —including amounts due to and from its JVs — was 113%
at the same date. Moody's expects CCRE's cash holdings and
operating cash flow will be sufficient to cover its short-term
debt and committed land premiums over the next 12-18 months.
CCRE's B1 senior unsecured bond rating is one notch lower than its CFR
because of the risk of structural subordination.
This subordination risk reflects the fact that most of CCRE's claims are
at the 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, the expected recovery rate for claims at the holding
company will be lower.
Moody's has also considered the following environmental, social
and governance (ESG) factors.
Moody's regards the impact of the deteriorating global economic outlook
amid the rapid and widening spread of the coronavirus outbreak as a social
risk under its ESG framework, because of the substantial implications
for public health and safety.
In terms of governance consideration, the Ba3 CFR takes into account
the concentration of CCRE's ownership in its controlling shareholder,
Wu Po Sum, who had a 73.66% stake in the company as
of June 2020. The company's provision of financial guarantees to
related parties will also increase its contingent liabilities and raise
concerns over potential risks of fund leakage.
These concerns are mitigated by (1) the presence of special committees
— in particular the audit and remuneration committees — that
are chaired by independent nonexecutive directors to oversee corporate
governance matters, and (2) the application of the Listing Rules
of the Hong Kong Stock Exchange and the Securities and Futures Ordinance
in Hong Kong in governing related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
CCRE's stable outlook reflects Moody's expectation that the
company can maintain (1) its leadership position in Henan province and
generate sales growth, (2) its adequate liquidity levels,
and (3) a disciplined approach to land acquisitions.
CCRE's ratings could be upgraded if it (1) successfully executes its sales
plans through the cycles, (2) broadens its geographic coverage in
a disciplined manner, (3) strengthens its offshore banking relationships,
and (4) maintains strong liquidity and prudent financial management practices.
Credit metrics indicative of an upgrade include its (1) revenue/adjusted
debt exceeding 75%-80%, (2) EBIT/interest coverage
rising above 3.5x, and (3) adjusted cash/short-term
debt rising above 2.0x.
Significant reduction in contingent liabilities associated with JVs or
lower risks of providing funding support to JVs could also be positive
for the ratings. This could result from a reduced usage of JVs
or a significant improvement in the financial strength of its JV projects.
On the other hand, Moody's could downgrade CCRE's ratings
if it (1) experiences a significant decline in contracted sales;
(2) suffers a significant decline in its profit margins; or (3) accelerates
its expansion, such that its liquidity deteriorates or its debt
levels rise significantly, or both.
Credit metrics indicative of a downgrade include (1) revenue/adjusted
debt below 60%-65% on a sustained basis; (2)
EBIT/interest consistently below 2.5x-3.0x;
or (3) adjusted cash/short-term debt below 1.0x-1.5x.
Downgrade pressure could also increase if the company's contingent
liabilities associated with JVs or the risk of providing funding support
to JVs increase significantly. This could result from a significant
deterioration in the financial strength and liquidity of its JV projects
or a substantial increase in investments in new JV projects.
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.
Founded in 1992, Central China Real Estate Limited (CCRE) is a leading
property developer in China's Henan province. As of the end of
2019, the company's land bank totaled 38.58 million square
meters in attributable gross floor area (GFA). Its revenue was
RMB30.8 billion ($4.4 million) in 2019.
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.
For ratings issued on a program, series, category/class of
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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.
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
