Hong Kong, September 09, 2019 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to the proposed USD notes to be issued by Longfor Group Holdings Limited
(Baa3 positive).
Longfor plans to use the proceeds from the proposed notes for refinancing
its existing indebtedness and corporate purposes.
RATINGS RATIONALE
"The proposed bond issuance, if completed, will have limited
impact on Longfor's credit metrics, because the proceeds will be
used to refinance the company's existing debt," says Kaven Tsang,
a Moody's Senior Vice President.
Longfor's H1 2019 results were broadly in line with Moody's expectations.
Its revenue/adjusted debt fell to 85% for the 12 months to 30 June
2019 from 95% in 2018, because the company raised debt in
H1 2019 to fund its business growth. Likewise, the company's
EBIT/interest declined to 6.9x from 7.6x over the same period.
Nevertheless, over the next 12-18 months, Moody's
expects Longfor's revenue/adjusted debt to trend towards 100%-110%
and EBIT/interest to improve to 7.0x-7.5x.
These projected ratios are strong for Longfor's Baa3 ratings.
The improvement is a result of a likely increase in revenue recognition
for the strong contracted sales recorded in the past one to two years.
The revenue growth will also outpace the growth in debt, based on
Moody's expectation that the company will maintain a disciplined
approach in pursuing growth.
Moody's points out that for the seven months between January and
July 2019, Longfor's total contracted sales reached RMB125.6
billion, representing a 9.9% year-on-year
growth from the RMB114.3 billion recorded in the corresponding
period in 2018.
Additionally, Longfor's projected rental income/interest coverage
of around 90%-95% over the next 12-18 months
is strong when compared with its investment-grade Chinese property
peers. Such a result would strengthen its debt-serving abilities.
Longfor's Baa3 issuer rating reflects the company's strong brand
name, good geographic diversification and track record of resilient
sales growth through cycles. The company's growing investment property
portfolio will also increase its recurring rental income and, in
turn, support its cash flow stability and profitability.
However, Longfor's growth strategy in residential development will
expose the company to industry cyclicality and execution risks,
and increase its funding needs.
Longfor's senior unsecured rating is unaffected by the subordination to
claims at the operating company level. Moody's explains that
despite Longfor's status as a holding company — with most
claims at the operating subsidiaries — creditors of Longfor benefit
from the group's diversified business profile, with cash flow generation
across a large number of operating subsidiaries and different business
segments in property development, investment property and apartment
rental. Such business diversification mitigates the structural
subordination risk.
Longfor's liquidity is good, underpinned by its prudent liquidity
management, strong ability to generate operating cash flow and good
access to funding. Its cash/short-term debt was strong at
4.2x at 30 June 2019.
Moody's expects that the company's cash holdings, along with
its operating cash flow, will be sufficient to cover its short-term
debt and committed land payments over the next 12 months.
On environmental, social and governance issues, Moody's
has considered the concentrated ownership by Longfor's key shareholder,
Madam Cai (the daughter of the chairwoman) who held a total 43.9%
stake in the company as of 30 June 2019.
The related party risk is partly mitigated by the presence of (1) four
independent non-executive directors of a total eight board of directors;
and (2) internal governance structures and disclosure standards that are
required under the Corporate Governance Code for companies listed on the
Hong Kong Stock Exchange.
The positive ratings outlook reflects Moody's expectation that the
improvement in Longfor's financial metrics will be sustained at levels
that are strong when compared with those of Baa3-rated Chinese
property peers over the next 12-18 months.
Upward ratings pressure could emerge, if Longfor grows its operating
scale while (1) improving its revenue/adjusted debt to more than 105%-115%
and EBIT/interest to more than 6.0x; (2) strengthening its
recurring rental income/interest coverage to above 95%-100%;
and (3) maintaining a strong liquidity position, with its cash/short-term
debt above 2.5x.
A ratings downgrade is unlikely, given the positive outlook.
However, Moody's could revise the outlook to stable if the
company records (1) a significant deterioration in sales; (2) a more
aggressive debt-funded expansion that results in the weakening
of its credit metrics, such that revenue/adjusted debt fails to
trend toward 105%, EBIT/interest falls below 5.5x-6.0x
on a sustained basis, or recurring rental income/interest coverage
fails to progress toward 95%; or (3) a weakening in its liquidity
position, with cash/short-term debt below 1.5x.
The principal methodology used in these ratings 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.
Longfor Group Holdings Limited is a leading developer in China's residential
and commercial property development sector. Founded in 1994,
the company began its business in Chongqing and has since established
a solid brand name in the Chongqing municipality.
At 30 June 2019, Longfor had a total land bank of 70.93 million
square meters in gross floor area, spanning 48 cities in five major
regions in China.
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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
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.
Kaven Tsang
Senior Vice President
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
