Hong Kong, January 11, 2021 -- Moody's Investors Service has assigned a B3 rating to Guangzhou Fineland
Real Estate Development Co., Ltd.'s (Fineland,
B2 stable) proposed senior unsecured USD notes.
Fineland plans to use the proceeds from the proposed notes to refinance
its existing offshore debt.
RATINGS RATIONALE
"Fineland's B2 corporate family rating (CFR) reflects the company's
(1) long operating history and established brand in its core market of
Guangdong province, where there is good demand for residential properties,
(2) adequate liquidity to cover near-term refinancing needs,
and (3) ability to foster relationships with domestic banks to support
its property development business," says Danny Chan, a Moody's
Assistant Vice President and Analyst.
"However, the company's credit profile is constrained by its (1)
small scale, (2) geographic concentration in Guangdong province
and high exposure to lower-tier cities, and (3) modest credit
metrics and ongoing funding needs to support its business growth over
the next 1-2 years," adds Chan.
The proposed issuance will improve Fineland'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 Fineland's debt leverage, as measured by revenue
to debt, will recover slightly to around 50% in the coming
12-18 months from 45% for the 12 months ended June 2020,
as its revenue growth will offset an increase in debt to fund its business
expansion.
Meanwhile, Fineland's EBIT/interest will stay around 2.0x
in the next 12-18 months, similar to the 2.0x it recorded
for the 12 months ended June 2020, because of a decline in its gross
margin. Moody's expects Fineland's gross margin will fall
slightly to around 31% in the next 1-2 years from 34%
for the 12 months ended June 2020, due to the regulatory cap on
property sale prices and higher land costs in some of its major markets.
Nevertheless, Fineland's gross margin remains robust relative to
its single-B rated Chinese property peers, thanks to contributions
from its high-margin urban redevelopment projects. Growing
contribution from these projects and robust housing demand in Fineland's
core markets in Guangdong province will also support the company's contracted
sales growth in the next 12-18 months.
Moody's expects the company's gross contracted sales to grow to RMB20
billion in 2021 from an estimated RMB17 billion and RMB12 billion in 2020
and 2019 respectively. This sales growth will support Fineland's
revenue growth and cash flow generation over the next 12-18 months.
Fineland's liquidity is adequate. Although the company's cash to
short-term debt coverage dropped to 93% as of 30 June 2020
from 117% at the end of 2019, Moody's expects that the company's
cash holdings, together with its operating cash flow after deducting
basic cash flow items, will be sufficient to cover its maturing
debt, committed land payments and dividend payments over the next
12-18 months.
The B3 senior unsecured debt rating is one notch lower than the corporate
family rating due to structural subordination risk. The majority
of Fineland's claims are at its operating subsidiaries and have priority
over claims at the holding company in a liquidation 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.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered Fineland's private company status,
which means that its information disclosure and corporate governance are
less transparent than that of listed property developers.
The company is also exposed to the risk associated with its concentrated
ownership and related party transactions, because the chairman owns
100% of the company. However, there have been limited
related party transactions relative to its scale over the past three years.
The chairman has also demonstrated his ability to manage the company through
the industry cycles for the last two decades.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Fineland's stable outlook reflects Moody's expectation that the company
will execute its business expansion plan while maintaining adequate liquidity
and stable credit metrics over the next 12-18 months.
Moody's could upgrade the ratings if Fineland (1) executes its business
plan to grow its scale; (2) strengthens its financial profile;
and (3) maintains sufficient liquidity.
Financial ratios indicative of an upgrade include Fineland's revenue/adjusted
debt above 70%-75%, EBIT/interest above 3.0x
and cash/short-term debt above 1.5x on a sustained basis.
Conversely, Moody's could downgrade the ratings if (1) Fineland's
contracted sales weaken as a result of weak execution or a delay in the
conversion of urban redevelopment projects; (2) it accelerates its
land acquisitions, such that its financial metrics and liquidity
weaken, or (3) it encounters high near-term refinancing needs.
Financial metrics indicative of a downgrade include Fineland's (1)
EBIT/interest falling below 1.5x-2.0x; or (2)
cash/short-term debt dropping below 1.0x 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.
Founded in 1995, Guangzhou Fineland Real Estate Development Co.,
Ltd. is a property developer based in Guangdong Province targeting
mid to high-end customers. The company adopts Eastern-style
design within its development to cater for different customers.
At the end of June 2020, the company was wholly owned by Fang Ming,
who is also the founder and chairman of the company.
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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Danny Chan
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
