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Rating Action:

Moody's assigns Ba3 to Road King's proposed perpetual securities

11 Nov 2019

Hong Kong, November 11, 2019 -- Moody's Investors Services has assigned a Ba3 senior unsecured debt rating to the proposed USD senior perpetual capital securities to be issued by RKPF Overseas 2019 (E) Limited and guaranteed by Road King Infrastructure Limited (Ba3 stable).

The outlook on the rating is stable.

Road King plans to use the proceeds from the proposed USD senior perpetual securities for acquisition of or investment in property projects or general corporate purposes.

RATINGS RATIONALE

"Although the proposed USD senior perpetual securities will increase Road King's debt leverage, this concern is partly mitigated by its still healthy interest coverage position, its possession of a stable and recurring cash flow from toll road investments and rental income that could cover 40%-50% of its interest expenses and good liquidity," says Cedric Lai, a Moody's Vice President and Senior Analyst.

Road King's Ba3 corporate family rating (CFR) reflects the company's track record in property development, its cautious approach to land acquisitions and financial management, and its track record of maintaining adequate liquidity throughout the business cycles. However, the CFR is constrained by the geographic concentration of the company's land bank, as well as the execution risks associated with any new toll road acquisitions.

Moody's expects Road King's debt leverage, as measured by revenue/ adjusted debt, will weaken slightly to around 60% over the next 12-18 months from 63% for the 12 months ended June 2019, as the company plans to increase its debt to support contracted sales growth.

In the first nine months of 2019, Road King, together with its joint ventures and associates, achieved contracted sales of RMB29.9 billion, up 28% from the same period last year. Such good contracted sales growth will underpin future revenue growth that can partly offset the effect of rising debt levels.

At the same time, Moody's expects Road King's EBIT/interest will weaken to 3.6x-4.1x over the next 12-18 months from the robust 5.4x recorded for the 12 months ended June 2019, due to the increase in debt and margin contraction. Nevertheless, the projected EBIT/interest ratio remain supportive of its Ba3 CFR.

Moody's expects Road King's gross profit margin will moderate to 33%-35% over the next 12-18 months from 40% in H1 2019 and 45% in 2018. The high gross margins during these historical periods were supported by the completion of certain high-margin projects in the Yangtze River Delta region.

Additionally, Moody's expects Road King's recurring income to cover around 40%-50% of the company's interest expense over the next 12-18 months, supported by moderate 5%-10% growth in cash receipts from toll toad and rental income.

Road King's liquidity is good. At the end of June 2019, its cash balance of HKD14.0 billion covered 115% of its short-term debt of HKD12.2 billion. Moody's expects Road King's cash holdings and operating cash flow will be sufficient to cover its short-term debt, committed land payments and dividend payments over the next 12 months.

RKPF Overseas 2019 (E) Limited 's Ba3 senior unsecured rating is not affected by subordination to claims at the operating company level, because the company's creditors benefit from its diversified business profile, including in particular the cash flow generated from the toll road business.

Moody's views the proposed perpetual securities as pure debt instruments and accordingly does not apply any equity treatment to these securities.

The Ba3 rating for the perpetual securities reflects the following factors:

(1) the perpetual securities will be irrevocably and unconditionally guaranteed by Road King, which implies that the rating on the perpetual securities is closely linked to Road King's rating; and

(2) the securities will at all times rank pari passu with all other present and future unsecured and unsubordinated obligations of Road King.

However, the rating on the perpetual securities could be lowered—relative to the company's senior unsecured rating—if debt with deferral features becomes a substantial portion of its capital structure, or if Moody's expects the company will defer many payments in advance of default.

In terms of environmental, social and governance (ESG) factors, the Ba3 CFR has considered the concentration of the company's ownership in its controlling shareholder, Wai Kee Holdings Limited, which held a 43% stake in the company as of 30 June 2019, and the presence of governance structure and disclosure standards as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.

The stable outlook on the rating reflects Moody's expectation that Road King will maintain its prudent financial management while growing its property development and toll road businesses, thereby preserving stable credit metrics and good liquidity.

Upward ratings pressure could emerge if Road King (1) grows its scale without sacrificing its profit margins; (2) grows its toll road dividends and improves its interest coverage from recurring income to above 0.6x-0.7x on a sustained basis; (3) maintains stable credit metrics, with EBIT/interest above 4.0x-4.5x and revenue/debt above 90%; and (4) maintains adequate liquidity.

On the other hand, downward ratings pressure could emerge if (1) Road King's liquidity deteriorates because of weaker sales, or aggressive land or other acquisitions; or (2) the operating performance of the company's property segment deteriorates. Credit metrics indicative of downward ratings pressure include EBIT/interest below 2.5x-3.0x or revenue/debt below 65% on a sustained basis.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed in Hong Kong, Road King Infrastructure Limited invests in toll road projects comprising five expressways across four provinces in China: Anhui, Hebei, Hunan and Shanxi. In addition, at 30 June 2019, the company had a property development portfolio with a land bank of 7.9 million square meters across the Bohai Rim, Yangtze River Delta, Greater Bay Area (including Hong Kong), Henan and Hubei Province.

Wai Kee Holdings Limited and Shenzhen Investment Limited are the largest shareholders of the company, with 43% and 27% stakes as of 30 June 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

Kaven Tsang
Senior Vice President
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

No Related Data.
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