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Rating Action:

Moody's assigns first-time B2 CFR to Redsun; outlook positive

 The document has been translated in other languages

06 Nov 2019

Hong Kong, November 06, 2019 -- Moody's Investors Service has assigned a first-time B2 corporate family rating (CFR) to Redsun Properties Group Limited (Redsun).

The outlook is positive.

RATINGS RATIONALE

"Redsun's B2 CFR reflects the company's long track record of developing properties in Jiangsu Province, its quality land bank, as well as its strong sales execution. The rating also considers the recurring income streams generated from its investment properties, which improve the stability of its debt servicing," says Cedric Lai, a Moody's Vice President and Senior Analyst.

Redsun, a Jiangsu-based property developer, has a long operating history that spans over 20 years in the province, and has established its brand and track record there.

The company has a solid market position in the Jiangsu province, which has a strong economy with steady property demand. Jiangsu province contributed around 81% of the company's contracted sales in the first half of 2019.

In addition to its strong presence in the Jiangsu province, Redsun has been broadening its geographic coverage to other regions over the last two years, including Central China and Western China.

The company has generated strong contracted sales growth over the past two years, with 40% year-on-year gross contracted sales growth to RMB43.8 billion in the first nine months of 2019, and 84% year-on-year growth to RMB47.3 billion in 2018.

Moody's expects that Redsun's gross contracted sales will continue to grow at an annual rate of 25%-30% to reach around RMB75 billion-RMB80 billion by 2020.

Additionally, Moody's expects Redsun's rental income will grow 25%-40% annually to around RMB450 million-RMB500 million over the next 12-18 months from RMB359 million in 2018. As a result, Redsun's adjusted rental income/interest coverage will stabilize at around 15%-20% over the next 12-18 months from 19% for the 12 months ended June 2019.

"On the other hand, the B2 CFR is constrained by Redsun's developing funding channels, moderate credit metrics, and high exposure to joint-venture businesses, which in turn lowers the transparency of its credit metrics," adds Lai, who is also Moody's Lead Analyst for Redsun.

Redsun has limited funding sources, and primarily relies on onshore bank loans and offshore bonds. However, the company has been proactively diversifying its funding channels.

Redsun's credit metrics are moderate, but Moody's expects the company's debt leverage — as measured by revenue to adjusted debt (including adjustments for its shares in joint ventures and associates) — will improve to 60%-65% over the next 12-18 months from 44% for the 12 months ended June 2019, on the back of increased revenue recognition from strong contracted sales over the past two years.

Similarly, Redsun's interest coverage — as measured by adjusted EBIT to interest (including adjustments for its shares in joint ventures and associates) -- should strengthen to 2.0x-2.5x from 2.2x over the same period. These projected ratios position the company's CFR strongly at the B2 rating level considering its business profile.

Redsun's liquidity is adequate. Specifically, the company's RMB16.9 billion in cash as of 30 June 2019 could cover 125% of its short-term debt of RMB13.5 billion. Moody's expects that the company's cash holdings, together with its operating cash flow, will be sufficient to cover its short-term debt and committed land payments over the next 12 months.

The positive outlook reflects Moody's expectation that Redsun will (1) continue its strong contracted sales growth; (2) strengthen its credit metrics over the next 12-18 months; and (3) improve its access to both offshore and onshore funding channels.

Redsun's ratings could be upgraded if the company improves its debt leverage and funding channels, while maintaining its strong contracted sales growth. Credit metrics indicative of a potential upgrade include (1) revenue/adjusted debt rising above 60%-65%; (2) adjusted EBIT/interest rising above 2.25x; and (3) cash/short-term debt rising above 1.25x, all on a sustained basis.

A downgrade is unlikely in the near term, given the positive outlook on Redsun's rating. However, the rating outlook could be revised to stable if the company fails to improve its credit metrics or maintain adequate liquidity over the next 12-18 months.

In terms of environmental, social and governance (ESG) factors, Moody's has taken into account the concentrated ownership by Redsun's key shareholder, Mr. Zeng Huansha, who held a 72% direct and indirect stake in Redsun as of 30 June 2019.

Moody's has also considered (1) the presence of three independent non-executive directors (INED) on Redsun's eight-member board of directors, (2) the fact that the INEDs also chair both the audit and remuneration committees; and (3) the presence of other internal governance structures and standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.

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.

Founded in 1996, Redsun Properties Group Limited listed on the Hong Kong Stock Exchange in July 2018 and has its headquarters in Shanghai and Nanjing.

Redsun engages in real estate development, commercial properties and hotel operations in China. At 30 June 2019, the company's total saleable resources comprised a gross floor area of around 15.7 million square meters, footprint expanded across 39 cities 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.

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

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