Hong Kong, September 03, 2020 -- Moody's Investors Service has assigned a B2 rating to Zhenro Properties
Group Limited's (B1 stable) proposed senior unsecured USD notes.
Zhenro plans to use the proceeds from the proposed notes to refinance
existing debt.
RATINGS RATIONALE
"Zhenro's B1 corporate family rating (CFR) reflects the company's (1)
quality and geographically diversified land bank, which helps the
company manage property market volatility and regulatory risks; (2)
ability to generate strong contracted sales growth; and (3) good
liquidity and improved access to funding, especially in the debt
capital markets," says Cedric Lai, a Moody's Vice President
and Senior Analyst.
"However, the company's credit profile is constrained by its improving
but still-moderate financial metrics as a result of its moderate
debt leverage," adds Lai.
The proposed issuance will improve Zhenro'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 Zhenro's revenue/adjusted debt and adjusted EBIT/interest,
excluding adjustments for its joint-ventures and associates,
will improve to around 50%-55% and around 2.0x,
respectively, over the next 12-18 months from 46%
and 1.7x for the 12 months ended June 2020, underpinned by
increased revenue recognition from strong contracted sales over the past
two years.
Zhenro's total contracted sales grew 1.3% to RMB69.6
billion in the first seven months of 2020 compared with last year despite
the impact from the coronavirus outbreak. Moody's expects its contracted
sales will slightly increase in 2020 when compared with 2019, supported
by its strong sales execution abilities, good-quality land
bank and sizable salable resources in upper tier cities.
The B2 senior unsecured debt rating is one notch lower than the CFR due
to structural subordination risk. This risk reflects the fact that
the majority of Zhenro's claims are at its 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. Consequently, the expected
recovery rate for claims at the holding company will be lower.
Zhenro's liquidity is good. Its cash holdings of RMB39.8
billion as of 30 June 2020 could cover its short-term debt of around
RMB19 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 by the owner
family, which held a 64.56% 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; and (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 its environmental, social and governance (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 rating outlook reflects Moody's expectation that Zhenro will
be able to execute its sales plan and remain prudent in its financial
management, such as by maintaining sufficient liquidity over the
next 12-18 months.
Moody's could upgrade Zhenro's ratings if the company (1) demonstrates
sustained growth in its contracted sales and revenue through the economic
cycles without sacrificing its profitability; (2) remains prudent
in its land acquisitions and financial management; (3) improves its
credit metrics, such that EBIT/interest registers at least 3.0x
and revenue/adjusted debt rises to at least 75%-80%
on a sustained basis; and (4) maintains adequate liquidity.
On the other hand, Moody's could downgrade the ratings if
Zhenro: (1) generates weak contracted sales; (2) suffers from
a material decline in its profit margins; (3) experiences an impairment
of its liquidity position, such that cash/short-term debt
falls below 1.0x; and/or (4) materially increases its debt
leverage.
Credit metrics indicative of a downgrade include EBIT/interest coverage
falling below 2.0x and/or adjusted revenue/debt falling below 50%-55%
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.
Zhenro Properties Group Limited was incorporated in the Cayman Islands
in 2014 and listed on the Hong Kong Stock Exchange in January 2018.
At 30 June 2020, Zhenro had 198 projects in 32 cities across China.
Its key operating cities include Shanghai, Nanjing, Fuzhou,
Suzhou, Tianjin and Nanchang.
The company was founded by Mr. Ou Zongrong, who indirectly
owned 54.6% of Zhenro Properties as of 31 December 2019.
Mr. Ou Guowei and Mr. Ou Guoqiang, the sons of Ou
Zongrong, together owned 9.96% of the company as of
the same date.
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.
For ratings issued on a program, series, category/class of
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provides certain regulatory disclosures in relation to the provisional
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be assigned subsequent to the final issuance of the debt, in each
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Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
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
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
