Hong Kong, June 24, 2020 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
the proposed notes to be issued by China Aoyuan Group Limited (B1 positive).
The ratings outlook is positive.
China Aoyuan plans to use the net proceeds from the proposed notes to
refinance existing offshore debt.
RATINGS RATIONALE
"The proposed notes issuance will lengthen China Aoyuan's debt maturity
profile and will not have a material impact on its credit metrics,
because the proceeds will mainly be used to refinance its existing debt,"
says Celine Yang, a Moody's Assistant Vice President and Analyst.
Moody's expects China Aoyuan will maintain financial discipline and control
its debt growth while pursuing an expansion strategy in the coming 12-18
months.
Moody's projects that the company's debt leverage - as measured
by revenue/adjusted debt - will improve to 70%-80%
in the next 12-18 months from around 48% in 2019,
underpinned by its strong contracted sales growth over the past one to
two years.
Similarly, its interest coverage -- as measured by
adjusted EBIT/interest coverage -- will likely improve to
around 3.0x in the next 12-18 months from 2.4x in
2019.
China Aoyuan's contracted sales fell by 13% year-on-year
to RMB33.3 billion in the first five months of 2020 due to the
impact from the coronavirus outbreak. But Moody's expects contracted
sales will remain largely stable in 2020 when compared to 2019,
supported by abundant saleable resources and the company's good execution
track record. The company registered 29% year-on-year
growth in contracted sales to RMB118.1 billion in 2019.
China Aoyuan's B1 CFR reflects its (1) strong execution capability even
during previous down cycles; (2) established brand in the economically
strong Guangdong Province; and (3) good access to onshore and offshore
funding.
On the other hand, the B1 CFR is constrained by its high debt leverage
and the execution risk associated with its rapid business expansion.
The CFR also considers its modest debt capital structure, given
its relatively high level of short-term debt. China Aoyuan's
short-term debt accounted for around 44% of its total reported
debt as of year-end 2019, up slightly from 41% as
of year-end 2018.
The B2 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 the operating
subsidiaries. These claims have priority over China Aoyuan'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.
The positive outlook reflects Moody's expectation that China Aoyuan's
credit metrics will improve over the next 12-18 months, driven
by improved revenue recognition from its sizable pre-sold,
unrecognized contracted sales and its controlled debt growth.
In terms of environmental, social and governance (ESG) factors,
Moody's has also considered the following.
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, given the substantial implications
for public health and safety.
With respect to governance risk, China Aoyuan's B1 CFR has considered
the company's concentrated ownership by its key shareholders, Guo
Zi Wen and Guo Zi Ning, who held a total 55.2% stake
in the company as of 2 January 2020. Such risk is partially mitigated
by the presence of internal governance structures and disclosure standards,
as required under the Corporate Governance Code for companies listed on
the Hong Kong Stock Exchange.
The company also has three special committees, namely an audit committee,
remuneration committee and nomination committee. All these committees
are either chaired by or dominated by independent nonexecutive directors
and exercise supervision.
The company has a stable dividend policy, as seen by its dividend
payout of around 35%-40% of its net profit over the
past three years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
China Aoyuan's rating could be upgraded if the company (1) achieves sustainable
growth in its contracted sales and revenue through the cycles without
sacrificing its profitability; (2) maintains prudent practices in
its land acquisitions and financial management; (3) improves its
credit metrics, such that EBIT/interest registers 3.0x or
above and revenue/adjusted debt stays within 75%-80%
or above on a sustained basis; and (4) maintains good liquidity,
such that its cash on hand consistently covers its short-term debt
and there is sufficient capacity under its maintenance covenants for bank
loans.
A downgrade is unlikely, given the positive outlook.
However, the outlook on the rating could return to stable if contracted
sales growth slows or becomes more volatile, or if the company's
credit metrics weaken, such that its (1) EBIT interest coverage
falls below 2.5x; (2) revenue/adjusted debt fails to trend
toward 70%; or (3) liquidity weakens, with its cash
holdings slipping below 1.0x short-term debt.
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.
China Aoyuan Group Limited is one of the leading property developers in
China focusing on the development of mass market properties. In
March 2019, China Aoyuan spun off its property management arm,
Aoyuan Healthy Life Group Company Limited. (Aoyuan Healthy Life),
which was listed on Hong Kong Stock Exchange.
As of 31 December 2019, the company had property projects in China,
Australia, Canada, Hong Kong and Macao, with a total
land bank of about 45.0 million square meters in gross floor area
(GFA), which can cover around three years of property development.
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.
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The first name below is the lead rating analyst for this Credit Rating
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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
