Hong Kong, January 05, 2021 -- Moody's Investors Service has assigned a B3 senior unsecured rating to
the proposed USD notes to be issued by Modern Land (China) Co.,
Limited (Modern Land, B2 stable).
Modern Land plans to use the proceeds from the proposed notes to refinance
its existing offshore debt.
RATINGS RATIONALE
"Modern Land's B2 corporate family rating (CFR) reflects the company's
niche in marketing and selling comfortable and eco-friendly homes,
demonstrated sales execution ability and adequate liquidity," says
Celine Yang, a Moody's Assistant Vice President and Analyst.
"Meanwhile, its rating is constrained by the company's improving
but still-low gross profit margin and modest financial metrics
due to its debt-funded growth and high finance costs," adds
Yang.
The proposed bond issuance will lengthen Modern Land's debt maturity profile
and improve its liquidity without having a material impact on the company's
credit profile, because it will use the proceeds to refinance maturing
debt.
Moody's expects Modern Land's debt leverage, as measured by
revenue/adjusted debt, will fall slightly to 60%-70%
in the next 12-18 months from 75% for the 12 months ended
June 2020 as debt growth likely outpaces revenue growth amid the company's
debt-funded business expansion.
Similarly, Moody's forecasts Modern Land's EBIT interest coverage
will edge down to 1.9x-2.0x from 2.2x over
the same period as increasing interest expenses on the back of rising
debt outpace EBIT growth.
Modern Land's total contracted sales grew about 16% to RMB36.96
billion for the first 11 months of 2020 compared with the same period
a year ago, despite the disruption caused by coronavirus pandemic
in H1 2020. Its sales growth outperformed the national average
of 9.5% over the same period. Moody's forecasts
the company will achieve mild sales growth of 5%-10%
in 2021 compared to 2020, supported by its sizable saleable resources
and track record of sales execution.
Modern Land's B3 senior unsecured debt rating is one notch lower
than the company's B2 CFR due to structural subordination risk.
The subordination risk refers to the fact that the majority of Modern
Land's claims are at its operating subsidiaries and, in the event
of a bankruptcy, they 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.
Modern Land's liquidity is adequate. Moody's expects the company's
cash holdings and operating cash flow will be sufficient to cover its
debt maturities and committed land premiums in the next 12-18 months.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the risks associated with Modern Land's concentrated
ownership, given that its founder and chairperson, Zhang Lei,
held an approximate 65.8% stake in the company as of the
end of June 2020. This risk is mitigated by the company's established
governance structures and standards as required by the relevant code for
companies listed on the Hong Kong Stock Exchange. Furthermore,
the company has three special committees in place — an audit committee,
a remuneration committee and a nomination committee -- two of which
are chaired and dominated by independent non-executive directors.
Moody's also 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 ESG framework, given the substantial implications
for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook reflects Moody's expectation that Modern Land will
achieve stable sales growth while maintaining modest credit metrics and
adequate liquidity over the next 12-18 months.
Moody's could upgrade Modern Land's ratings if the company (1) grows
its scale and improves its profit margin; (2) maintains a reasonable
cash balance, with cash/short-term debt above 1.5x;
(3) maintains strong financial discipline in its land acquisitions,
with EBIT/interest coverage above 2.5x-3.0x and revenue/adjusted
debt above 70%-75%, both on a sustained basis;
and (4) reduces its exposure to non-standard borrowings.
On the other hand, Moody's could downgrade Modern Land's ratings
if (1) the company's liquidity and ability to generate operating cash
flow decline beyond expectations because of falling contracted sales and
aggressive land acquisitions; and (2) its revenue recognition is
slower than expected, or its profit margin declines further,
leading to further weakness in its EBIT/interest coverage and financial
flexibility.
Specifically, Moody's could downgrade the ratings if (1) Modern
Land's restricted and unrestricted cash balance fall below 100%
of its short-term debt; or (2) the company's EBIT/interest
coverage declines below 1.5x 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.
Modern Land (China) Co., Limited was founded in Beijing in
2000 by Mr. Zhang Lei, who is the company's current
chairman. The company specializes in developing green housing units
and is among the few early leaders in China's green and eco lifestyle
market.
Modern Land was listed on the Hong Kong Stock Exchange in July 2013.
As of June 2020, the company had a gross land bank of around 12.4
million square meters in terms of gross floor area.
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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YuYing (Celine) Yang
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
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
