Hong Kong, January 04, 2011 -- Moody's Investors Service has assigned a first-time, provisional
(P)B1 corporate family rating to China South City Holdings Ltd (CSC).
Moody's has also assigned a provisional (P)B2 rating to CSC's
proposed USD senior unsecured notes.
The outlook for the ratings is stable.
The provisional status of the corporate family rating will be removed
after the company has raised the USD senior notes on satisfactory terms
and conditions.
The proceeds from the proposed bond issuance will fund CSC's construction
and expansion of its trade centers as well as ancillary residential units
and support facilities in Shenzhen, Nanning, Nanchang,
Heyuan and Xi'an.
RATINGS RATIONALE
"CSC's (P)B1 corporate family rating reflects the company's
unique business model of successfully developing and operating integrated
trade centers in Shenzhen," says Jiming Zou, a Moody's
Analyst.
"The ratings also consider CSC's ability in accessing large-scale
suburban land plots at attractive prices, as well as the support
it receives from the government on infrastructure improvement and favorable
project terms," says Zou.
"As a result, CSC has achieved a high gross margin of above
50% and is able to recover costs within three to four years,"
continues Zou.
"However, CSC's expansion into large-scale developments
in new locations presents an execution risk that constrains its ratings,"
he says.
Zou says that there is still uncertainty that CSC can replicate its successful
Shenzhen model at new locations. Any delay in CSC's selling
residential and trade center units at the new locations could adversely
affect the substantial cash outlay required for construction and expansion.
"Moreover, sales of commercial properties at the new trade
centre may take time and will only materialize when the centre has reached
a critical threshold of tenants and commercial activities,"
he says.
While there is execution risk to replicate the success of CSC Shenzhen,
this risk is partially reduced by the company's flexibility to accelerate
sales of its properties in Shenzhen to raise liquidity cushioning any
unexpected material shortfall in sales at the new locations over the next
two years.
Upon issuance of the proposed notes, CSC is expected to have a fair
amount of cash of about HK$5 billion to provide a buffer against
any down market stress scenario.
The prudent management of this cash reserve also supports the current
ratings.
Moody's expects some improvement to CSC's cash flow and credit
metrics as its projects in Heyuan and Nanning make progress.
CSC's provisional bond rating is one notch below its corporate family
rating, reflecting structural subordination arising from the company's
bank loans at its domestic subsidiaries, which account for nearly
26% of total assets as of March 2010.
Moody's does not expect this ratio to be materially reduced in the coming
2-3 years.
The stable outlook reflects Moody's expectation that CSC will be able
to raise the necessary amount of notes and manage its expansion plan in
a disciplined manner -- without aggressively entering new
locations. Also the company is expected to maintain a reasonable
level of cash reserves to manage its execution risk in the new locations.
The ratings could be under pressure for a downgrade if, (1) CSC
fails to execute its business plan, (2) the regional economy where
it operates experiences a significant downturn, which in turn causes
a material impairment to CSC's sales, (3) CSC undertakes further
aggressive expansion into more new locations.
Moody's would consider downgrade triggers of EBITDA/interest expense
coverage falling below 3.0x; cash balance falling below RMB1-1.5
billion; or its debt/book capitalization rising above 50%
- 55%.
Upward rating pressure is unlikely to emerge in the near term.
However over the medium term, upgrade pressure could emerge if CSC
(1) establishes a track record of selling trade center units in Nanning
and Nanchang according to plan, (2) achieves an increasing share
of cash flow from rental income, (3) demonstrates a healthy financial
profile with debt/book capitalization falling below 40%-45%
and EBITDA/ interest expense rising above 4.5x--5.0x,
and (4) strengthens its liquidity profile with broadened banking relationships.
The principal methodology used in this rating was Global Homebuilding
Industry published in March 2009.
China South City Holdings Ltd is one of the leading developers and operators
of large-scale integrated logistics and trade centers in Shenzhen,
Nanning, Nanchang and Xi'an. The company has listed
its shares on the stock exchange of Hong Kong since September 2009.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Hong Kong
Jiming Zou
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Peter Choy
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's assigns (P)B1 rating to China South City; outlook stable