Hong Kong, August 08, 2019 -- Moody's Investors Service has assigned a first-time B1 corporate
family rating (CFR) to Zhongliang Holdings Group Company Limited.
The outlook for the rating is stable.
RATINGS RATIONALE
"Zhongliang's B1 CFR reflects the company's strong brand name
in second-tier and lower-tier cities in the Yangtze River
Delta region, and robust track record of contracted sales growth,"
says Cedric Lai, a Moody's Vice President and Senior Analyst.
Zhongliang, a Shanghai-based property developer, has
a strong market position and well-recognized brand name in second-tier
and lower-tier cities in the Yangtze River Delta region,
where there is good demand for residential properties. The Yangtze
River Delta region contributed around 59.4% of the company's
contracted sales in 2018.
However, Moody's expects Zhongliang will continue to expand
to other regions, such as Central and Western China, the Bohai
Rim Region, and Pearl River Delta, to reduce its exposure
to local regulatory measures and regional economy volatilities.
The company has a track record of robust contracted sales growth,
underpinned by strong housing demand in lower-tier cities over
the past two years and strong sales execution. As a result,
the company's contracted sales rose 56% year-on-year
to RMB101.5 billion in 2018, following 242% year-on-year
growth in 2017.
Looking ahead, Moody's expects Zhongliang's contracted
sales will grow 10%-15% per annum to reach around
RMB120-140 billion in the next 12-18 months. Such
a situation will support growth in both revenue and cash flow generation
over the same period.
Moody's expectations considers the company's high level of
saleable resources, which totaled 36.1 million square meters
of gross floor area across 334 residential projects at the end of 2018.
Zhongliang's land bank as of December 2018 could support around three
years of property development.
Although the company's scale is large in terms of contracted sales
value, its debt leverage -- as measured by revenue/adjusted
debt -- shows some cyclicality, in line with its B1-rated
peers.
The company's debt leverage improved to 89% in 2018 from
56% in 2017, Moody's expects it will slightly weaken to around
75%-85% over the next 12-18 months as Zhongliang
takes on debt to fund land replenishment.
Zhongliang's interest coverage -- as measured by adjusted EBIT/interest
-- improved to 2.5x in 2018 from 1.5x in 2017.
Moody's expects that its interest coverage will be maintained at 2.6x
over the next 12-18 months, after factoring in the expected
lower finance cost following its listing on the Hong Kong Stock Exchange
and improved access to onshore and offshore funding.
"Zhongliang's B1 CFR is constrained by the concentration of its land bank
in second-tier and lower-tier cities, and by its reliance
on expensive non-bank financing," adds Lai, who is
also Moody's Lead Analyst for Zhongliang.
At the end of 2018, 83% of the company's land bank
was located in lower-tier cities and the remaining 17% in
second-tier cities.
Moody's expects demand in lower-tier cities to weaken over
the next 12-18 months, given that the Chinese government
has scaled back its funding for the resettlement of shantytown residents.
This change in policy will negatively affect Zhongliang's operating
performance, and is already incorporated in Moody's forecast
for the company's contracted sales growth for the next 12-18
months.
Zhongliang's B1 CFR is also constrained by the company's reliance
on expensive non-bank financing. Onshore trust loans and
loans from asset management companies accounted for around 58%
of its total reported debt at end 2018. However, the company's
listing on the Hong Kong Stock Exchange in July 2019 could help broaden
its funding channels in the future.
Zhongliang's liquidity position is good. The company's cash
balance of RMB23.1 billion at the end of 2018 covered 160%
of its short-term debt. Such cash holdings, together
with the company's operating cash flow, should be sufficient
to cover its short-term debt and estimated committed land payments
over the next 12-18 months.
With respect to governance risks, Moody's has considered the risk
associated with the concentration of the company's ownership in
its controlling shareholders, Mr. Yang Jian and his spouse,
who held a 84.2% stake in the company at 18 July 2019.
The financial risk associated with this ownership concentration is partly
mitigated by (1) the presence of three independent non-executive
directors on a board of seven directors, and of two independent
non-executive directors chaired the audit and remuneration committees,
and (2) the application of the Listing Rules of the Hong Kong Stock Exchange
and the Securities and Futures Ordinance in Hong Kong.
The stable rating outlook reflects Moody's expectation that Zhongliang
will continue to grow its contracted sales, maintain its good liquidity
position, and remain prudent in its land acquisitions.
Moody's could upgrade the CFR if Zhongliang (1) achieves strong
contracted sales growth; (2) strengthens its financial profile,
with revenue/adjusted debt above 80% and EBIT/interest above 3.0x
on a sustained basis; (3) maintains its good liquidity position;
and (4) reduces its trust financing and borrowings from asset management
companies.
Moody's could downgrade the CFR in case of a deterioration in Zhongliang's
contracted sales growth, liquidity position, or credit metrics.
Credit metrics that could trigger a rating downgrade include (1) revenue/adjusted
debt below 50%-55%; or (2) adjusted EBIT/interest
coverage below 2.0x, both 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.
Zhongliang Holdings Group Company Limited is a Shanghai-based residential
property developer. The company engages in real estate development
in China.
At 18 July 2019, Zhongliang was 84.2% owned by its
chairman, Mr. Yang Jian, as well as his spouse,
who was acting in concert.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
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Cedric Lai
Vice President - Senior 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
