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
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same series, category/class of debt, security or pursuant
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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
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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
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60322, Germany, in accordance with Art.4 paragraph
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
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
