Hong Kong, August 03, 2020 -- Moody's Investors Service, ("Moody's") 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 offshore indebtedness.
RATINGS RATIONALE
"Powerlong's B1 corporate family rating (CFR) 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 cities with strong economic
fundamentals where demand for its properties is more favorable,"
says Cedric Lai, a Moody's Vice President and Senior Analyst.
"However, the company's credit profile is constrained
by execution risk, the high level of capital required for its business
strategy, and its moderate debt leverage," adds Lai.
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.
Moody's expects Powerlong's adjusted EBIT/interest and adjusted debt/adjusted
capitalization will remain largely stable at around 2.7x-2.8x
and 55%-56%, respectively, over the next
12-18 months, underpinned by increased revenue booking from
strong contracted sales over the past two years.
Meanwhile, Moody's expects the company's adjusted rental income/interest
coverage will slightly weaken to around 37% over the next 12-18
months from 39% in 2019, since interest expense growth will
slightly outpace rental income growth over this period.
Powerlong's total contracted sales grew 8.0% to RMB31.5
billion in the first six months of 2020 compared with last year.
Moody's expects its contracted sales will slightly increase in 2020 when
compared with 2019, supported by good sales execution abilities,
its focus on the economically strong Yangtze River Delta region,
which can in turn support a more robust housing demand.
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.
Powerlong's liquidity is adequate. Its cash holdings of RMB18.5
billion as of 31 December 2019 cover its short-term debt of RMB15.3
billion. Moody's expects the company's cash holdings, together
with expected operating cash inflow, will be able to cover its committed
land purchases, dividend payments, as well as capital spending
and payables for its previous acquisitions, over the next 12-18
months.
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 59%
stake in the company as of 31 December 2019.
Moody's has also considered (1) the fact that independent directors chair
the audit and remuneration committees; (2) the low level of related-party
transactions and dividend payouts; (3) the presence of other internal
governance structures and standards as required by the Hong Kong Exchange.
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 our ESG framework because of the substantial implications
for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable ratings outlook reflects Moody's expectation that Powerlong
will (1) maintain growth in its contracted sales, especially of
commercial properties; (2) ramp up its malls to generate streams
of rental revenue that will improve coverage on interest expenses over
the next 12-18 months; and (3) maintain adequate liquidity
and exercise prudence in 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
3.0x; (2) rental income/interest coverage rising above 0.5x;
(3) adjusted debt/adjusted total capitalization falling below 50%-53%
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 2.0x;
(2) rental income/interest dropping below 0.3x; (3) adjusted
debt/adjusted total capitalization rising above 55%-58.
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.
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 59% stake
in the company at 31 December 2019.
At 31 December 2019, Powerlong's land bank for development totaled
around 29.7 million square meters in gross floor area under development
and for future 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.
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
