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Rating Action:

Moody's assigns B2 to Powerlong Real Estate's proposed USD notes

04 Nov 2019

Hong Kong, November 04, 2019 -- Moody's Investors Service has assigned a B2 rating to Powerlong Real Estate Holdings Limited's (B1 stable) proposed senior unsecured USD notes.

Powerlong plans to use the proceeds from the proposed notes to refinance its existing indebtedness.

RATINGS RATIONALE

"The proposed issuance will improve Powerlong's liquidity profile and will not materially affect its credit metrics, because the company will use the proceeds to refinance existing debt," says Cedric Lai, a Moody's Vice President and Senior Analyst, and also Moody's Lead Analyst for Powerlong.

Moody's expects that Powerlong's rental income will grow 25% annually to around RMB1.4 billion in 2019 and to RMB1.8 billion in 2020 from RMB1.1 billion in 2018, underpinned by the scheduled opening of its new retail malls. The company plans to open six retail malls in the second half of 2019, and a further ten in 2020.

As a result, Powerlong's adjusted rental income/interest coverage will improve to 40%-45% over the next 12-18 months from 37% for the 12 months ended June 2019.

Moody's also expects Powerlong's adjusted EBIT/interest and adjusted debt/adjusted capitalization will remain largely stable around 2.6x and 58%, respectively, over the next 12-18 months.

Powerlong has achieved robust contracted sales over the past two years. In the first nine months of 2019, the company, together with its joint ventures and associates, achieved strong 57% year-on-year contracted sales growth to RMB45.1 billion, after recording 97% year-on-year growth to RMB41 billion in 2018. Such strong contracted sales should underpin healthy revenue growth over the next 12-18 months.

Powerlong's B1 corporate family rating reflects its (1) track record of developing and selling commercial and residential properties; (2) growing recurring revenue, which improves the stability of its debt servicing; and (3) expansion into higher-tier cities in China where demand for its properties is more favorable.

However, its credit profile is constrained by execution risk, the high level of capital required for its business strategy, and its high debt leverage.

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 Powerlong'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.

In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership in its controlling shareholder, Hoi Kin Hong and Hoi Wa Fong, who held a 61% stake in the company as of 8 July 2019.

Moody's has also considered (1) the presence of two independent nonexecutive directors, who chair the audit and remuneration committees; and (2) the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong to any related-party transactions.

The stable ratings outlook reflects Moody's expectation that Powerlong will (1) continue to grow its contracted sales, especially for commercial properties; (2) ramp up its malls to generate rental revenue streams that will improve rental income/interest coverage to about 0.4x-0.5x over the next 12-18 months; and (3) maintain adequate liquidity and exercise prudence in its land acquisitions.

Upward ratings pressure could emerge if Powerlong continues to grow in scale while maintaining its adequate liquidity and sound credit metrics, and improves its debt leverage to a level that matches its business model of holding investment properties.

Credit metrics that could trigger a ratings upgrade include: (1) adjusted EBIT/interest rising above 3.5x; (2) rental income/interest coverage rising above 0.6x; (3) adjusted debt/adjusted total capitalization falling below 50%; and/or (4) cash/short-term debt rising above 1.5x, all on a sustained basis.

Moody's could downgrade Powerlong's ratings if the company's sales weaken or if it pursues a more aggressive expansion strategy that weakens its credit metrics.

Credit metrics that could trigger a ratings downgrade include: (1) adjusted EBIT/interest falling below 2.5x; (2) rental income/interest dropping below 0.4x; (3) adjusted debt/adjusted total capitalization rising above 55%; and/or (4) cash/short-term debt falling below 100%.

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.

Powerlong Real Estate Holdings Limited is a Chinese property developer focused on building large-scale integrated residential and commercial properties in China. The company listed on the Hong Kong Exchange in October 2009. The founding Hoi family held a 61% stake in the company at 8 July 2019.

At 30 June 2019, Powerlong's land bank for development totaled around 24.4 million square meters in gross floor area under development and for future development.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com 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.

Cedric Lai
Vice President - Senior 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

No Related Data.
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