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Rating Action:

Moody's assigns first-time B1 and B2 ratings to Hengda Real Estate and Tianji Holding; outlook positive

 The document has been translated in other languages

30 Oct 2018

Hong Kong, October 30, 2018 -- Moody's Investors Service has assigned a first-time B1 corporate family rating (CFR) to Hengda Real Estate Group Company Limited, a 63.5% owned onshore subsidiary of China Evergrande Group (Evergrande, B1 positive).

At the same time, Moody's has assigned a first-time B2 CFR to Tianji Holding Limited, a wholly owned offshore subsidiary of Hengda.

Moody's has also assigned a B2 senior unsecured rating to the proposed notes to be issued by Scenery Journey Limited and guaranteed by Tianji.

All the rating outlooks are positive.

The proposed notes will also be supported by a Deed of Equity Interest Purchase Undertaking and a Keepwell Deed between Hengda, Tianji, Scenery, and the bond trustee.

The note proceeds will be used mainly for offshore debt refinancing by Hengda.

Moody's expects that Hengda will complete the note issuance upon satisfactory terms and conditions, including proper registrations with the National Development and Reform Commission in China (A1 stable).

RATINGS RATIONALE

"Hengda's B1 CFR reflects its status as an onshore flagship subsidiary of Evergrande, and as the platform that owns and manages Evergrande's core property development business in China," says Wenhan Chen, a Moody's Assistant Vice President and Analyst.

As of June 2018, Hengda accounted for 96% of revenue, 86% of cash, 85% of adjusted debt, 88% of total assets, and 84% of the land bank of Evergrande.

Hengda's B1 CFR reflects its strong sales execution. Its contracted sales reached RMB285 billion in 1H 2018 after achieving 35% year-on-year growth to RMB478 billion in the full year 2017.

Moody's expects the company will achieve contracted sales of around RMB570-RMB620 billion per annum over the next 12-18 months, despite the company's target of reducing its land reserve by 5% per annum between July 2017 and June 2020.

This projected sales growth is underpinned by the company's sizable land reserves nationwide, which totaled 809 projects with 256 million square meters in gross floor area as of 30 June 2018.

The company's large scale, as measured by contracted sales, will continue to position it among the top residential developers in China (A1, stable). This will support the company's access to the domestic bank and debt markets.

In addition, the B1 CFR reflects Hengda's good profitability, underpinned by a low-cost land bank and economies of scale. Moody's expects Hengda's gross profit margin to stay around 35% over the next 12-18 months, largely flat compared to the 2017 level of 35%. This level of profitability still compares well with the average of around 30% reported by Moody's-rated property developers in China.

Supported by revenue growth, declining debt and stable profit margins, Moody's expects the company's interest coverage, as measured by EBIT/interest, will improve to 2.8x in 2018 and 3.5x in 2019 from 2.5x for the 12 months ended June 2018 .

On the other hand, the rating is constrained by the company's still high debt leverage. At the end of June 2018, the company's revenue/adjusted debt was 58%.

Given the strong contracted sales in the past 12-18 months, Moody's expects the company's debt leverage -- as measured by revenue/adjusted debt -- will improve to 61% and 81% by the end of 2018 and the end of 2019, respectively, as it completes the delivery of properties sold and slows the rise in debt through slower land acquisitions.

Moody's has included the RMB130 billion in investments from Hengda's strategic investors in the calculation of the company's adjusted debt, but notes that the funds were treated as equity by the company, in accordance with China GAAP.

The rating is also constrained by Hengda's private company status, such that information disclosure is less transparent than that of its listed peers.

The positive outlook on Hengda's rating reflects Moody's expectation that Hengda will continue to improve its debt leverage over the next 12-18 months.

The rating could be upgraded if Hengda (1) demonstrates tighter discipline in its business growth and acquisitions, (2) continues to report sufficient liquidity, and (3) improves its credit metrics.

Financial indicators of rating upgrade pressure include Hengda's (1) cash/short-term debt exceeding 1.0x-1.25x, (2) revenue/adjusted debt exceeding 75%-80%, and (3) EBIT/interest exceeding 2.5x-3.0x on a sustained basis.

A downgrade of Hengda's CFR is unlikely given the positive outlook. However, the rating outlook could return to stable if the company's credit metrics are unlikely to improve to levels that will support an upgrade over the next 12-18 months.

Tianji's B2 CFR reflects the company's standalone credit profile and a one-notch rating uplift, based on Moody's expectation that Hengda will provide financial support to Tianji in a situation of financial stress.

The one-notch uplift reflects (1) Hengda's full ownership of Tianji, (2) Tianji's status as the primary platform for Hengda to invest in offshore property projects and raise offshore funds, and (3) Hengda's track record of providing financial support to Tianji.

Tianji's standalone credit profile factors in its moderately large scale, weak liquidity, and weak credit metrics.

At the end of June 2018, Tianji had 33 projects across 20 cities in China, with a total land bank of 16.6 million square meters. The company reported RMB38 billion in contracted sales in 2017. This scale is large relative to other low single B rated Chinese property developers.

Tianji's liquidity position is weak, and it has to rely on support from Hengda. Its cash of RMB18.6 billion at the end of 2017 was inadequate to cover its short-term debt of RMB89.4 billion.

Moody's expects Tianji's EBIT/interest will fall to around 1.4x-1.5x in the next 12-18 months from 1.9x in 2017 as it takes on debt to grow in scale.

Similarly, Tianji's debt leverage -- as measured by revenue/adjusted debt -- will fall to around 22% over the next 12-18 months from 27% at the end of 2017.

The B2 senior unsecured rating of the proposed notes reflects Moody's expectation that Hengda will provide financial support through honoring its obligations under the Deed of Equity Interest Purchase Undertaking rather than through a payment guarantee.

The B2 senior unsecured rating is also not affected by subordination to claims at the operating companies because Moody's expects support from Hengda to Tianji to flow through the holding company rather than directly to the main operating companies, thereby mitigating any differences in expected loss that could result from structural subordination.

The positive outlook on Tianji's rating reflects the positive outlook on Hengda's rating as well as Hengda's strengthened capability to provide support in times of need.

Tianji's CFR could be upgraded if (1) Hengda's rating is upgraded and (2) Tianji maintains a stable standalone profile, with its EBIT/interest ratio staying above 1.25x-1.50x.

On the other hand Tianji's rating outlook could return to stable if (1) its liquidity position further weakens; (2) the outlook on Hengda's rating is revised to stable due to a deterioration in its financial profile; (3) its significance within the Hengda group declines, leading to reduced financial or operation support.

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.

Hengda Real Estate Group Company Limited is among the top property developers in China by sales volume, with a standardized operating model. Founded in 1996 in Guangzhou, Hengda has rapidly expanded its business across the country over the past few years. At 30 June 2018, Hengda's land bank totaled 256 million square meters (sq.m) in gross floor area across 220 cities in China. Hengda is the property arm and the flagship subsidiary of Evergrande. At 30 June 2018, Evergrande owned 63.5% of Hengda's shares.

Incorporated in Hong Kong in 2009, Tianji Holding Limited is an offshore holding company that houses some of Hengda's property projects in China and overseas, including Hengda's Hong Kong headquarters.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Wenhan Chen
AVP-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

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Chris Park
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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