Hong Kong, January 26, 2021 -- Moody's Investors Service has assigned a B2 rating to China SCE Group
Holdings Limited's (B1 stable) proposed senior unsecured USD notes.
China SCE plans to use the proceeds from the proposed notes to refinance
its existing offshore debt.
RATINGS RATIONALE
"China SCE's B1 corporate family rating (CFR) reflects its (1) long
operating record and growing operating scale; (2) diversified geographic
coverage and well-located land bank; and (3) good liquidity
and long track record of access to both onshore and offshore funding,"
says Danny Chan, a Moody's Assistant Vice President and Analyst.
"However, the company's credit profile is constrained by its moderate
debt leverage associated with its fast expansion and growing investment
property portfolio, as well as its increased exposure to joint ventures
(JVs)," adds Chan.
The proposed issuance will improve China SCE's liquidity profile
and will not materially affect its credit metrics, because the company
will use the proceeds to refinance existing debt.
Moody's expects China SCE's revenue/adjusted debt to improve mildly
to around 51%-58% in 2021 and 2022 from around 49%
for the 12 months to June 2020 and 43% in 2019, because expected
revenue growth will more than offset the expected increase in debt and
financial guarantees to JVs.
Likewise, Moody's expects the company's interest coverage,
as measured by adjusted EBIT/interest, to improve to around 2.6x-3.1x
in 2021 and 2022 from 2.4x for the 12 months ended June 2020,
as revenue and EBIT growth will outpace growth in interest expenses,
despite an expected margin decline to around 25% from 27%
during the same period.
China SCE's contracted sales increased 26.1% to RMB101.5
billion in 2020 from a year ago amid the coronavirus outbreak, following
robust 56% year-on-year growth to RMB80.5
billion for the full year 2019. Moody's expects China SCE's
contracted sales to grow about 15% year-on-year in
2021, supported by good sales execution abilities and its ample
salable resources in tier 2 and strong tier 3 cities in China.
China SCE's B2 senior unsecured bond rating is one notch below its
CFR because of the risk of structural subordination. This subordination
risk reflects the fact that the majority of claims are at the operating
subsidiaries and have priority over claims at the holding company in a
bankruptcy scenario. In addition, the holding company lacks
significant mitigating factors for structural subordination. As
a result, the expected recovery rate for claims at the holding company
will be lower.
China SCE's liquidity is good. The company's cash-on-hand
of RMB25.0 billion as of 30 June 2020 covered around 121%
of its short-term debt of RMB20.7 billion. Moody's
expects its cash holdings and operating cash flow will be sufficient to
cover its maturing debt, committed land premiums and dividend payments
in the next 12-18 months.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the company's concentrated ownership by its controlling
shareholder, Mr. Wong Chiu Yeung, who held a 50.40%
stake in the company at 30 June 2020.
The risk of concentrated ownership is mitigated by (1) the presence of
three independent nonexecutive directors on the board, who also
chair the audit and remuneration committees; (2) its moderate 20%-25%
dividend payout ratio over the past three years; and (3) the presence
of other internal governance structures and standards as required under
the Corporate Governance Code for companies listed on the Hong Kong Stock
Exchange.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook on China SCE's B1 CFR reflects Moody's
expectation that the company will maintain revenue growth and exercise
prudence in its land acquisitions and debt management over the next 12-18
months while maintaining healthy liquidity.
Moody's could upgrade China SCE's ratings if it demonstrates
stable sales growth and increases its scale, maintains its prudent
approach to land acquisitions, and maintains adjusted 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, China SCE's ratings could be downgraded if (1)
its contracted sales weaken; (2) its profit margins decline significantly;
(3) its liquidity becomes impaired, such that cash/short-term
debt falls below 1.0x; or (4) its debt leverage increases
materially.
Credit metrics indicative of a rating downgrade include adjusted EBIT/interest
coverage below 2.0x and 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 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.
Founded in 1996, China SCE Group Holdings Limited listed on the
Hong Kong Stock Exchange in February 2010. It was 50.40%
owned by its chairman, Mr. Wong Chiu Yeung, as of 30
June 2020.
As of 30 June 2020, the company had a total land bank of around
33.03 million square meters (sqm) in terms of gross floor area
(GFA), with nationwide coverage in different tiers of cities across
different regions in China.
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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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
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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
