Hong Kong, May 24, 2021 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
the proposed USD notes to be issued by Kaisa Group Holdings Ltd (B1 stable).
Kaisa plans to use the proceeds from the proposed notes to refinance its
offshore debt.
RATINGS RATIONALE
"Kaisa's B1 corporate family rating (CFR) reflects the company's
well-established market position and quality land bank in higher-tier
cities in the Great Bay Area (GBA); robust gross profit margin,
supported by material revenue contribution from its urban redevelopment
projects; and good liquidity," says Danny Chan,
a Moody's Assistant Vice President and Analyst.
"Meanwhile, the company's B1 CFR is constrained by its
moderate credit metrics; high geographic concentration; narrow
funding channels and high funding costs because of its history of debt
restructuring; and increasing exposure to joint ventures (JVs),"
adds Chan.
The proposed bond issuance will lengthen Kaisa'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.
Moody's forecasts Kaisa's debt leverage, as measured by revenue/adjusted
debt, will improve to 55%-60% over the next
1-2 years from 48% in 2020, reflecting the company's
strong revenue growth due to solid sales and controlled debt growth over
the past two years.
Moody's also projects Kaisa's EBIT/interest coverage will improve to 1.9x-2.0x
over the next 1-2 years from 1.7x in 2020, because
its revenue growth and declining borrowing costs will offset a mild contraction
in its gross profit margin. Moody's forecasts the company's
gross profit margin will edge down to around 28% from 29%
over the same period due to rising land and construction costs.
Moody's expects Kaisa's annual contracted sales growth to slow down
but remain healthy at 10%-15% each year to around
RMB120 billion in 2021 and around RMB130 billion in 2022. These
sales growths will be supported by its sufficient saleable resources,
which are mainly located in higher-tier cities, strong housing
demand in its core markets, and its strong sales execution ability,
despite a tightening in credit conditions in China. Moderating
contracted sales growth will also contain Kaisa's debt funding needs.
Kaisa's attributable contracted sales rose strongly, by 134%
to RMB42.2 billion for the first four months of 2021 when compared
with RMB18.0 billion in the corresponding period a year earlier.
The substantial growth was largely due to the low base in the first half
(H1) of 2020 caused by the coronavirus pandemic.
Kaisa's B2 senior unsecured debt rating is one notch lower than
the company's B1 CFR due to structural subordination risk. The
subordination risk refers to the fact that the majority of Kaisa'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.
Kaisa's liquidity is good. The company's ample cash balance
provides sufficient buffer against its material exposure to offshore senior
debt. Moody's expects the company's cash holdings, together
with its likely operating cash inflow, to cover its unpaid land
premiums, dividend payments and maturing debt over the next 12-18
months. As of the end of 2020, the company had a cash balance
of RMB42.3 billion (including restricted cash of RMB6.2
billion), which could cover about 1.8x of its total short-term
debt of RMB23.1 billion as of the same date.
In terms of environmental, social and governance (ESG) considerations,
Moody's has factored in the company's history of debt restructuring
and share suspension, as well as high debt leverage. In addition,
the company has a concentrated shareholder structure, with a 39.04%
stake in the company owned by its founder, Kwok Ying Shing,
and his family members as of the end of 2020.
Kaisa has maintained a low level of related-party transactions
over the past two to three years. However, in March 2021,
the company proposed to acquire a property project in Beijing from its
chairman for about RMB13 billion. The quality of the property is
good because it is in a prime location in Beijing, and the associated
financial risk is tempered by the fact that part of acquisition will be
funded by internal cash resources and debt financing, and cash proceeds
from a planned rights issuance.
Governance concerns pertaining to Kaisa are also partly tempered by the
governance structures and disclosure standards as required under the Corporate
Governance Code for companies listed on the Hong Kong Stock Exchange.
For example, the aforementioned related-party transaction
will be subject to shareholder approval, and Kwok Ying Shing and
his family members will abstain from voting.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable rating outlook reflects Moody's expectation that Kaisa
will maintain stable contracted sales growth without embarking on aggressive
debt-funded acquisitions, improve its credit metrics and
maintain good liquidity over the next 12-18 months.
Kaisa's rating could be upgraded if the company (1) maintains its adequate
liquidity; (2) diversifies its funding channels; and (3) improves
its EBIT/interest coverage to above 3.0x-3.5x and
revenue/adjusted debt to above 75%-80% on a sustained
basis.
On the other hand, Moody's could downgrade the rating if the company
fails to achieve its expected sales growth or aggressively acquires land
beyond Moody's expectation, such that its financial metrics and
liquidity deteriorate.
Credit metrics indicative of a downgrade include the company's (1)
cash to short-term debt falling below 1.0x-1.5x;
(2) revenue/adjusted debt falling below 50%; and (3) EBIT/interest
coverage falling below 2.0x, all 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.
Kaisa Group Holdings Ltd is in real estate development in China,
including urban redevelopment projects in the Greater Bay Area.
As of 31 December 2020, the company's land bank comprised an aggregate
gross floor area of 28.7 million square meters of saleable resources
across 51 cities 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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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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
