Hong Kong, May 06, 2021 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
Powerlong Real Estate Holdings Limited's (B1 positive) proposed senior
unsecured USD notes.
Powerlong plans to use the proceeds from the proposed notes to refinance
its offshore debt.
RATINGS RATIONALE
"Powerlong's B1 corporate family rating (CFR) reflects the company's strong
sales execution and long track record of successfully developing and selling
commercial and residential properties in its key markets in China;
low-cost land bank, which underpins its profitability;
growing nondevelopment income, which improves the stability of its
debt servicing; and good liquidity," says Cedric Lai,
a Moody's Vice President and Senior Analyst.
"However, its credit profile is constrained by the company's moderate
geographic concentration, the execution risks associated with its
business expansion, the high level of capital demand associated
with its business strategy and its moderate debt leverage," adds
Lai.
The proposed issuance will improve Powerlong's liquidity and debt maturity
profile without materially affecting its credit metrics, because
the company will use the proceeds to refinance its existing debt.
Moody's expects Powerlong's debt leverage — as measured by revenue/adjusted
debt — will improve to 55%-65% over the next
12-18 months from 51% in 2020, supported by revenue
growth from solid contracted sales in the past 1-2 years and controlled
debt increases. Similarly, Moody's expects the company's
adjusted EBIT/interest will rise to 3.0x-3.5x from
about 3.1x over the same period.
The company's total contracted sales grew 35% to RMB81.6
billion in the 2020. Moody's expects its contracted sales to grow
to RMB90-RMB95 billion in 2021, supported by solid sales
execution and good-quality land bank in the Yangtze River Delta
region. Strong contracted sales will support Powerlong's
future revenue recognition and liquidity.
Powerlong's rental income will also grow 25% to around RMB1.9
billion in 2021 from RMB1.6 billion in 2020, underpinned
by the scheduled opening of its new retail malls. This growing
rental income will strengthen Powerlong's stable cash flow and debt-servicing
obligations. The company opened nine retail malls in 2020 and plans
to open 13 more malls in 2021.
The B2 senior unsecured debt rating is one notch lower than Powerlong's
CFR 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 good. Its total cash holdings of RMB28.3
billion at the end of 2020 could cover 1.4x of its RMB20.9
billion short-term debt as of the same date. Moody's expects
the company's cash holdings, together with expected operating cash
flow, will be able to cover its committed land purchases,
dividend payments, 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
shareholders, Hoi Kin Hong and Hoi Wa Fong, who held a 59%
stake in the company as of 31 December 2020.
Moody's has also considered (1) the oversight of the company's special
committees, of which its audit and remuneration committees are chaired
by two independent nonexecutive directors; (2) Powerlong's stable
dividend payout ratio of below 40% over the past three years;
and (3) the application of the Listing Rules of the Hong Kong Stock Exchange
and the Securities and Futures Commission Ordinance in Hong Kong to oversee
related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The positive rating outlook reflects Moody's expectations that Powerlong's
credit metrics will improve over the next 12-18 months, driven
by strong revenue recognition and good profit margins. It also
reflects Moody's expectation that Powerlong's growing investment
property portfolio will strengthen its recurring rental income,
which in turn will support cash flow stability and profitability.
Moody's could upgrade the ratings if Powerlong (1) continues to grow in
scale while maintaining adequate liquidity and sound credit metrics;
and (2) improves its debt leverage to a level that matches its business
model of holding investment properties. Credit metrics indicative
of an upgrade include: (1) adjusted EBIT/interest rising above 3.0x;
and (2) revenue/adjusted debt in excess of 60%-65%.
A downgrade of the rating is unlikely, given the positive outlook.
However, Moody's could revise Powerlong's outlook to stable if the
company's sales weaken or if it pursues a more aggressive expansion strategy
that weakens its credit metrics. Credit metrics indicative of an
outlook change include: (1) adjusted EBIT/interest falling below
2.5x; and (2) revenue/adjusted debt failing to trend toward
55%.
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, which is 59% owned
by the founding Hoi family as of 31 December 2020, listed on the
Hong Kong Exchange in October 2009.
As of 31 December 2020, Powerlong's land bank for development totaled
around 36.5 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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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
