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
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rating assigned, and in relation to a definitive rating that may
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The first name below is the lead rating analyst for this Credit Rating
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Cedric Lai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
China (Hong Kong S.A.R.)
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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
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Moody's Investors Service Hong Kong Ltd.
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