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Rating Action:

Moody's assigns first-time B1 CFR to Sichuan Languang Development, outlook stable

 The document has been translated in other languages

03 Feb 2020

Hong Kong, February 03, 2020 -- Moody's Investors Service has assigned a first-time B1 corporate family rating (CFR) to Sichuan Languang Development Co., Ltd. (Languang Development).

The rating outlook is stable.

RATINGS RATIONALE

"Languang Development's B1 CFR reflects the company's established track record of developing mass market properties in the Chengdu region, its adequate liquidity, as well as the notable improvement in the company's operating scale and geographic diversification since 2015," says Celine Yang, a Moody's Assistant Vice President and Analyst.

"However, the B1 CFR is constrained by the moderate size of the company's land bank, the associated high funding needs to replenish the land needed to support its business model, and its developing funding channels," adds Yang, who is also Moody's Lead Analyst for Languang Development.

Languang Development has a long track record and has established its brand name in mass market residential property development in Chengdu since 1990. The company's sales in the Chengdu region increased to RMB28.7 billion in 2018 from RMB10.2 billion in 2014, representing a compound annual growth rate of 29.6%.

Languang Development has leveraged its experience in property development in Chengdu and expanded its nationwide presence since 2015. As a result its sales to Chengdu region fell to 19% of its total contracted sales for the nine months ended 30 September 2019 from 34% in 2018 and 41% in 2017.

Moody's expects Languang Development's contracted sales to grow to around RMB110 billion in 2020 from RMB90 billion for the 12 months ended 30 September 2019, after a 47% year-on-year growth in 2018 and 93% in 2017. Its operating scale is comparable to its high B-rated Chinese property peers.

Meanwhile, Moody's forecasts that its sales from outside the Chengdu region will remain at 75%-85% of Languang Development's total contracted sales over the next 2-3 years, because more than 80% of its land bank are located outside the Chengdu region. The company's land bank is diversified. In particular, no single city accounted for more than 15% of its land bank as of 30 June 2019.

The B1 CFR is constrained by its developing funding channels, given its limited track record in tapping the offshore debt capital markets. Languang Development's reliance on trust loans and asset management borrowings is high, and accounted for around 29% of its total reported debt at 30 September 2019. These borrowings usually bear higher interest rates and are associated with higher refinancing uncertainties than bonds or bank loans.

But Moody's expects the company's funding access will improve, as it strives to diversify its funding channels after its debut offshore bond issuance in September 2018, and establishment of deeper strategic cooperation relationship with banks in China.

Languang Development's land bank of 24 million square meters as of 30 June 2019 - as measured by gross floor area - was roughly sufficient to support its development and sales over the next 2.0-2.5 years. Its land bank is moderate when compared to some its B1 rated Chinese property peers. Languang Development's land business strategy will likely lead to ongoing high funding needs, due to its land bank replenishment requirements, which, in times of tighter credit conditions, will result in higher funding costs and refinancing risks.

Moody's expects that Languang Development's debt leverage will improve moderately towards 65% in the coming 12-18 months compared to 57% for the 12 months ended 30 June 2019. The improvement will be driven by revenue growth, because of the sizable unrecognized sales from the company's strong contracted sales growth over the past two to three years.

Meanwhile, adjusted EBIT/interest will decline slightly to 2.4x-2.5x over the next 12-18 months from 2.6x for the 12 months ended 30 June 2019, driven by the increase in interest expenses. Such credit metrics are comparable to those of B1-rated Chinese property peers.

Languang Development's liquidity is adequate. Moody's estimates that the company's unaudited cash balance totaled RMB21.1 billion as of 30 September 2019, which, together with Moody's estimation of its operating cash flow, can cover committed land payments over the next 12-18 months and debt due within the same period.

In terms of governance considerations, Moody's has taken into account the potential change of control risk from the company's key shareholder's concentrated ownership, and the pledging of 28.36% of the company's total outstanding shares as of 13 December 2019. This risk is incorporated in the B1 CFR.

Moody's has also considered (1) the fact that independent directors chair the audit and remuneration committees; (2) the low level of related-party transactions and dividend payouts; (3) the presence of other internal governance structures and standards as required by the Shanghai Stock Exchange; and (4) the company's financial policy to pursue expansion, which resulted in its elevated leverage.

The stable rating outlook takes into account Moody's expectation that Languang Development will (1) sustain its sales growth; (2) maintain its adequate liquidity position; and (3) improve its debt leverage.

Moody's could upgrade Languang Development's ratings if the company (1) demonstrates sustained growth in its contracted sales and revenue through the economic cycles without sacrificing profitability; (2) demonstrates prudence in its land acquisition and financial management; (3) continues to improve its funding channels and maintains adequate liquidity; and (4) improves its credit metrics, such that EBIT/interest registers at least 3.0x and revenue/adjusted debt rises to 75%-80% on a sustained basis.

On the other hand, the company's ratings could come under downward pressure if Languang Development: (1) generates weak contracted sales or cash collection; (2) experiences a deterioration of its funding access or liquidity position; and/or (3) materially increases its debt leverage.

Credit metrics indicative of a ratings downgrade include EBIT/interest coverage falling below 2.0x, and/or adjusted revenue/debt falling below 50%-55% 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.

Sichuan Languang Development Co., Ltd. primarily develops residential and commercial properties in China. The company listed on the Shanghai Stock Exchange in 2015 through a backdoor listing. Its chairman, Mr. Yang Keng, effectively owned 56.46% of the company's shares at 30 September 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.

YuYing (Celine) Yang
Asst Vice President - 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

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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