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Rating Action:

Moody's assigns Baa3 to Longfor Group Holdings' proposed USD notes

 The document has been translated in other languages

06 Jan 2020

Hong Kong, January 06, 2020 -- 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 to refinance its existing indebtedness and for corporate purposes.

RATINGS RATIONALE

"The proposed bond issuance, if completed, will have limited impact on Longfor's credit profile, given that the proceeds will mainly be used to refinance the company's existing debt," says Kaven Tsang, a Moody's Senior Vice President.

Moody's expects Longfor's revenue/adjusted debt to trend towards 100%-110% over the next 12-18 months from 85% for the 12 months ended 30 June 2019. And, Moody's expects that the company's EBIT/interest will improve to 7.0x-7.5x from 6.9x over the same period. These projected ratios are strong for Longfor's Baa3 ratings.

The improvement in debt leverage is a result of a likely increase in revenue recognition from the strong contracted sales recorded in the past 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 Longfor's aggregate contracted sales for the 11 months to 30 November 2019 reached RMB222.7 billion, representing a 22.2% year-on-year growth from the RMB182.2 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, in turn supporting its cash flow stability and profitability.

However, Longfor's residential development is exposed to industry cyclicality and regulatory risks in the Chinese residential property market.

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 subsidiary level — 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 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. Moody's expects that the company will have sufficient cash and operating cash flow to cover its committed land payments and maturing debt over the next 12-18 months. As of 30 June 2019, the company had cash holdings, including restricted cash, of RMB58.1 billion, which covered about 4.2x of its maturing debt of RMB13.7 billion as of the same date.

On governance risk, Moody's has considered the concentrated ownership by Longfor's key shareholder, Madam Cai Xinyi (the daughter of the chairwoman), who held a total 43.9% stake in the company as of 30 June 2019.

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.

Longfor has a track record of prudent financial management, which enables it to maintain a stable level of debt leverage despite cyclicality in the Chinese property market. Moreover, Longfor has developed a sizable investment property portfolio which offers revenue and asset values that buffer against challenging market conditions.

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 its 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 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

No Related Data.
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