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Rating Action:

Moody's assigns B2 rating to Jiangsu Zhongnan's proposed USD notes

29 Mar 2021

Hong Kong, March 29, 2021 -- Moody's Investors Service has assigned a B2 senior unsecured rating to the proposed USD notes to be issued by Haimen Zhongnan Investment Development (International) Co., Ltd. and irrevocably and unconditionally guaranteed by Jiangsu Zhongnan Construction Group Co., Ltd. (B1 stable).

Jiangsu Zhongnan plans to use the proceeds from the proposed notes to refinance its existing offshore debt.

RATINGS RATIONALE

Jiangsu Zhongnan's B1 corporate family rating (CFR) reflects the company's (1) strong sales execution ability, as demonstrated by its sizable operating scale, (2) improved geographic diversification, (3) improving credit metrics and good liquidity, and (4) proven track record of funding access in the onshore capital market.

However, the company's CFR is constrained by (1) its exposure to lower-tier cities, (2) the low profitability of its construction and property development businesses, (3) the execution risks associated with the company's fast growth plan, and (4) its high exposure to joint ventures (JVs).

"The proposed bond issuance will lengthen Jiangsu Zhongnan's debt maturity profile and improve its liquidity without having a material impact on its credit metrics, because the company will use the proceeds to refinance maturing debt," says Danny Chan, a Moody's Assistant Vice President and Analyst.

Moody's expects Jiangsu Zhongnan's debt leverage, as measured by revenue/adjusted debt, will strengthen to around 100% in 2021 from 86% for the 12 months ended June 2020. This is because its revenue growth will likely outpace the increase in adjusted debt on the back of strong contracted sales registered in the past two to three years. Similarly, the company's EBIT/interest coverage will improve to around 2.5x from 2.0x over the same period, supported by stable margins and controlled debt growth.

Jiangsu Zhongnan's contracted sales grew about 14% to RMB223.8 billion in 2020 from RMB196.0 billion in 2019 despite the disruptions caused by COVID-19. Moody's forecasts Jiangsu Zhongnan's sales will achieve annual growth of about 10% to RMB240 billion-RMB250 billion in 2021, supported by its sufficient saleable resources and the gradual recovery of China's economic activities. These contracted sales will support the company's future revenue growth and liquidity.

The B2 senior unsecured debt rating is one notch lower than Jiangsu Zhongnan's B1 CFR due to structural subordination risk. The subordination risk refers to the fact that the majority of Jiangsu Zhongnan's claims are at its operating subsidiaries and, in the event of a bankruptcy, have priority over claims at the holding company. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.

Jiangsu Zhongnan's liquidity is good. Moody's expects the company's cash holdings and operating cash flow will be sufficient to cover its debt maturities, dividend payments and committed land premiums in the next 12-18 months.

In terms of environmental, social and governance (ESG) considerations, Moody's has taken into consideration the company's concentrated ownership by Zhongnan Urban Construction Investment Co., Ltd., which owned 53.80% stake in the company as of 18 March 2021, with 59.82% of these shares pledged. The associated risk is partially mitigated by the approval and disclosure requirements of the Shenzhen Stock Exchange for material related-party transactions by listed companies, and Jiangsu Zhongnan's maintaining of a modest dividend payout of 10%-25% of net profits in the past three years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The stable outlook reflects Moody's expectation that Jiangsu Zhongnan will (1) control its leverage while expanding business scale, (2) achieve stable contracted sales growth, and (3) maintain good liquidity in the next 12-18 months.

Jiangsu Zhongnan's rating could be upgraded if the company improves its financial position while maintaining solid contracted sales growth. Credit metrics indicative of a possible upgrade include its EBIT/interest coverage above 2.5x-3.0x and cash/short-term debt above 1.25x, on a sustained basis.

A significant reduction in the contingent liabilities associated with JVs or reduced risk of providing funding support to JVs would also be positive for the rating. This could result from a reduced usage of JVs or a significant improvement in the financial strength of its JV projects.

Jiangsu Zhongnan's rating could be downgraded if the company executes large debt-funded expansions or acquisitions, suffers declines in contracted sales or revenue, or records deteriorating liquidity on a sustained basis.

Credit metrics indicative of a possible downgrade include its EBIT/interest coverage falling below 1.5x-2.0x and cash/short-term debt falling below 1.0x, both on a sustained basis.

The rating could also be downgraded 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.

Jiangsu Zhongnan Construction Group Co., Ltd. is based in China's Jiangsu Province and principally engages in property development and construction services. The company had a total land bank of around 44.1 million square meters as at June 2020.

Jiangsu Zhongnan was founded by Chen Jinshi, who has been engaged in the construction business in China since 1988, when he established the company. The company was listed on the Shenzhen Stock Exchange in 2009 with a market capitalization of RMB27.40 billion as of 23 March 2021.

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 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Danny Chan
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

No Related Data.
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