Hong Kong, April 01, 2019 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
the proposed USD notes to be issued by China SCE Group Holdings Limited
(B1 stable).
The rating outlook is stable.
The proceeds from the proposed issuance will be used mainly to refinance
offshore existing debt.
RATINGS RATIONALE
"The proposed notes will improve China SCE's liquidity profile and lengthen
its debt maturity profile and not have a material impact on its credit
metrics, as the company plans to use the proceeds to refinance offshore
debt," says Danny Chan, a Moody's Analyst and also Moody's
Lead Analyst for China SCE.
China SCE's B1 corporate family rating reflects its track record and strong
market position in Quanzhou in Fujian Province, growing operating
scale, good liquidity position, and stable profit margins
after its expansion to cities outside Fujian.
On the other hand, the corporate family rating is constrained by
China SCE's increased debt leverage and the execution risks associated
with its expansion.
Moody's expects China SCE's debt leverage — as measured
by revenue/adjusted debt — will improve to around 60%-65%
in the next 12-18 months from 49% in 2018, supported
by an expected increase in project delivery and controlled debt growth
stemming from more disciplined land acquisitions. Specifically,
Moody's expects that the company will limit its land acquisitions to no
more than 50% of its total contracted sales, and keep debt
growth within 10%-20% year-on-year
over the next 12-18 months.
Nevertheless, its interest coverage — as measured by adjusted
EBIT/interest — will fall to 2.5x-3.0x over
the next 12-18 months from around 3.0x in 2018, as
its gross margin is likely to decline to around 29% from 35%
over the same period. This decline in turn reflects rising land
costs and price restrictions imposed in some of its major markets over
the past 1-2 years, as well as increasing project deliveries
in second tier cities with lower profitability.
Though Moody's expects China SCE's year-on-year contracted
sales growth, including contributions from its joint ventures and
associates, to moderate to 15%-25% over the
next 12-18 months to around RMB60-65 billion, the
increased sales will support liquidity and future revenue growth.
In 2018, China SCE's contracted sales grew by 54% year-on-year
to RMB51.4 billion, after achieving 41% annual growth
in 2017.
China SCE's debt leverage, as measured by revenue/adjusted
debt, deteriorated to 49% in 2018 from 67% in 2017
partly because of the company's strategy to preserve liquidity on
its balance sheet amid a tight credit environment. Its net debt
consequently only grew by 12% year on year, much lower than
the 55% year-on-year increase in total debt.
Its interest coverage also weakened to 3.0x from 3.3x in
2017 due to increased interest expenses from higher debt level.
China SCE's liquidity is adequate. At the end of December 2018,
its cash balance of RMB20.0 billion was sufficient to cover its
short-term debt of RMB10.5 billion, committed land
payments and dividend payments over the next 12 months.
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 and have priority over China SCE's senior unsecured claims
in a bankruptcy scenario. In addition, the holding company
lacks significant mitigating factors for structural subordination.
The stable outlook on China SCE's B1 corporate family rating reflects
Moody's expectation that the company will maintain sustained revenue growth
and remain prudent in its land acquisitions and debt management over the
next 12-18 months, while maintaining a moderate leverage
ratio and healthy liquidity.
China SCE's ratings could be upgraded if the company: (1) demonstrates
stable sales growth and increases its scale; (2) maintains its prudent
approach to land acquisitions; and (3) maintains EBIT/interest coverage
in excess of 3.0x and revenue/adjusted debt in excess of 75%-80%
on a sustained basis.
On the other hand, the company's ratings could be downgraded if
China SCE: (1) generates weak contracted sales; (2) records
a material decline in its profit margins; (3) experiences an impairment
of its liquidity position, such that cash/short-term debt
falls below 1.0x; and/or (4) materially increases its debt
leverage.
Credit metrics indicative of a ratings downgrade include EBIT/interest
coverage below 2.0x and/or 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.
Founded in 1996, China SCE Group Holdings Limited listed on the
Hong Kong Stock Exchange in February 2010. It was 50.1%
owned by its chairman, Mr. Wong Chiu Yeung, as of 31
December 2018.
As of 31 December 2018, the company had a total land bank (excluding
investment properties) of 23.2 million square meters with nationwide
coverage in different tiers of cities across different regions in China.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Please see www.moodys.com for any updates on changes to
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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
AVP - 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
