Hong Kong, January 06, 2020 -- Moody's Investors Service has assigned a B1 rating to Yuzhou Properties
Company Limited's proposed senior unsecured USD notes.
The rating outlook is stable.
Yuzhou intends to use the net proceeds from this offering primarily to
refinance its existing offshore indebtedness.
RATINGS RATIONALE
"The proposed bond issuance will support Yuzhou's liquidity and lengthen
its debt maturity profile," says Celine Yang, a Moody's Assistant
Vice President and Analyst. "In addition, the issuance will
not materially affect Yuzhou's credit metrics, because the
company will use the proceeds to refinance its maturing debt."
Moody's forecasts that Yuzhou's debt leverage — as measured by revenue/adjusted
debt and including shares from joint ventures and associates — will
gradually recover to around 60% towards the end of 2020 from around
43% for the 12 months ended 30 June 2019, driven by likely
stronger revenue recognition and controlled debt growth over the next
12-18 months.
Moody's points out that Yuzhou's higher-than-expected debt
leverage for the 12 months ended 30 June 2019 was mainly due to its raising
of additional debt to prefund its maturing debt and to fund land purchases
in 1H 2019.
Moody's expectation of Yuzhou's revenue growth over the next 12-18
months is based on the company's stronger contracted sales in the last
two years. Yuzhou's contracted sales grew notably by 33.2%
to RMB67.2 billion for the first 11 months of 2019, after
growing 39% to RMB56 billion in 2018.
Yuzhou maintained a good track record of high profit margins in the 31%-36%
range in the past six years (2013-2018). But Moody's says
that its gross margin will likely fall to around 28%-30%
in the coming 12-18 months, because the price caps implemented
in tier 1 and major tier 2 cities and increasing land costs will squeeze
its margins.
Consequently, Moody's estimates that the company's adjusted EBIT/interest
— including shares from joint ventures and associates — will
improve to a lesser extent than its improvement in leverage, with
adjusted EBIT/interest trending towards 2.7x-3.0x
in 2019-20 from 2.6x for the 12 months ended 30 June 2019.
Yuzhou's Ba3 corporate family rating reflects its (1) track record of
developing and selling residential properties in the Yangtze River Delta,
Bohai Rim and West Strait area, (2) growing operating scale and
improved geographic diversification, and (3) strong liquidity.
However, its Ba3 rating is constrained by debt leverage that is
weaker than its Chinese property developer peers at the Ba3 rating level.
Yuzhou's B1 senior unsecured debt rating is one notch lower than its corporate
family rating, due to structural subordination risk. This
risk reflects the fact that the majority of claims are at the operating
subsidiaries and have priority over Yuzhou's senior unsecured claims in
a bankruptcy scenario. In addition, the holding company lacks
significant mitigating factors for structural subordination. As
a result, the likely recovery rate for claims at the holding company
will be lower.
In terms of governance risk, Yuzhou's Ba3 CFR has considered the
company's concentrated ownership in its controlling shareholder,
Mr. Lam Lung On, who held a 57.45% stake in
the company as of 20 November 2019.
In terms of its policy on financial management, in the past four
to five years, Yuzhou has maintained its land acquisition spending
at around 50% of total cash received from property sales,
and the company has kept its reported net debt to equity below 75%.
In addition, Yuzhou's dividend payout ratio has stayed below
50% in the past five years.
Related-party risk is partly mitigated by (1) Yuzhou's board,
which has eight directors in total, three of whom are independent
nonexecutive directors, (2) the presence of audit, remuneration
and nomination committees, which are all chaired by an independent
non-executive director, and (3) the presence of other internal
governance structures and standards, as required under the Listing
Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance
in Hong Kong to oversee its corporate governance.
Yuzhou's liquidity is good. At 30 June 2019, the company's
cash balance of RMB38.9 billion covered 285% of its short-term
debt of RMB13.7 billion. Moody's expects that over the next
12 months, Yuzhou's cash holdings and operating cash flow will be
sufficient to cover committed land premiums, short-term debt
and dividend payments.
The stable outlook on Yuzhou's ratings reflects Moody's expectation that
the company will maintain its contracted sales and revenue growth,
strong liquidity position and measured debt growth.
Upward ratings pressure over the medium term could emerge, if Yuzhou
(1) grows in scale, (2) improves its credit metrics, (3) maintains
a strong liquidity position, or (4) establishes a track record of
access to the domestic and offshore debt markets.
Credit metrics indicative of upward ratings pressure include the company
showing (1) EBIT interest coverage in excess of 4.0x, or
(2) revenue/adjusted debt in excess of 90%.
Downward ratings pressure could emerge if Yuzhou shows a weakening in
its (1) contracted sales growth, (2) liquidity position, or
(3) credit metrics.
Credit metrics indicative of downward ratings pressure include (1) cash/short-term
debt below 1.5x, (2) EBIT interest coverage below 2.5x-3.0x,
and (3) revenue/adjusted debt below 60% on a sustained basis.
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.
Yuzhou Properties Company Limited is a property developer that focuses
on residential housing in the West Strait Economic Zone and the Yangtze
River Delta. Established in Xiamen in the mid-1990s,
Yuzhou is one of the city's largest developers. The company moved
its headquarters to Shanghai in 2016.
Yuzhou listed its shares on the Hong Kong Stock Exchange in 2009.
At 30 June 2019, Yuzhou's land bank totaled 19.18 million
square meters in saleable gross floor area.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
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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
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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.
YuYing (Celine) Yang
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
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
