Hong Kong, March 09, 2018 -- Moody's Investors Service has assigned a first-time B2 corporate
family rating (CFR) to Zhengzhou Zhongrui Industrial Group Co.,
Ltd (Zhongrui).
At the same time, Moody's has assigned a B3 senior unsecured
rating to the proposed bonds to be issued by Zhongrui Industrial Group
Limited and guaranteed by Zhongrui, China Coal Solution Co.,
Ltd and Hechang Real Estate Group Co., Ltd.
The ratings outlook is stable.
Zhongrui will use the proceeds from the proposed bonds to fund its coal
solution business, refinance existing debt, and for general
corporate purposes.
The ratings reflect Moody's expectation that Zhongrui will complete the
proposed bond issuance upon satisfactory terms and conditions, including
proper registrations with the National Development and Reform Commission
and the State Administration of Foreign Exchange in China (A1 stable).
RATINGS RATIONALE
"Zhongrui's B2 CFR reflects the company's established
track record in property development and our expectation that this business
will grow faster than its coal solution business," says Kaven
Tsang, a Moody's Vice President and Senior Credit Officer.
"At the same time, the B2 CFR considers the risk diversification
offered by the coal solution business," adds Tsang,
who is also Moody's Lead Analyst for Zhongrui.
Zhongrui has more than 10 years of property development experience in
China, focused on major second-tier cities and the Yangtze
River Delta, one of the country's most affluent regions.
The company operates its property development segment through its 42%-owned
Hechang Real Estate Group Co., Ltd. It has established
its brand in Zhengzhou, Henan Province, where it has a land
bank with a gross floor area of 3.86 million sqm, representing
around 43% of its total land bank, at the end of 2017.
Moody's expects that the property development business will enjoy
fast growth over the next 2-3 years, supported by good demand
in its home base and by its geographic expansion.
Zhengzhou, the capital city of China's most populous province,
Henan, is a fast-growing economy, recording 8.4%
GDP growth in 2016. Such strong economic growth underpins demand
for residential properties.
The company's acquisition in 2017 of 8 property projects from Top
Spring International Holdings Limited, which include property projects
in Shenzhen, also helps support sales growth and partly reduces
geographic concentration risk.
Supported by these factors, Moody's expects Zhongrui to achieve
annual revenue growth of around 20% in 2018 and around 12%
in 2019.
Zhongrui's property development business demonstrates better profit
margins than its coal solution business. Moody's expects
that Zhongrui's property development business will contribute more
than 60% of total EBITDA over the next 1-2 years.
Given the relative importance of the property development business to
Zhongrui's overall operations, Moody's has applied the
Homebuilding And Property Development Industry rating methodology in its
assessment of Zhongrui's ratings.
The B2 CFR factors in Zhongrui's better industry risk diversification
when compared with pure property developers. In particular,
its property development and coal solution businesses are exposed to different
business dynamics and risk factors.
Zhongrui's coal solution business benefits from steady demand and
revenues from its thermal coal business. Its customers are mainly
state-owned coal-fired power generating companies,
which accounted for around 67% of the company's total coal
sales by value in the first nine months of 2017.
Moreover, Zhongrui's B2 CFR considers the strengths of its
wholly owned subsidiary, China Coal Solution Co Ltd, in terms
of scale, its track record in coal trading, strength in providing
integrated management services and quality clients.
Established in 2005, China Coal Solution is a large private coal
trading company in China by coal volume. It transported 42.75
million tons of coal in 2016 and achieved revenues of RMB33.7 billion
in 2016.
Moody's expects that China Coal Solution's business growth
will continue to be supported by: (1) its ability to offer value-added
services, including the design and arrangement of logistics,
and processing of coal; and (2) low operating costs through economies
of scale and strong cost management.
Zhongrui's B2 rating is constrained by its moderately high debt
leverage owing to its debt-funded growth.
The company's debt will continue to increase, as it expands
its coal solution and property development businesses.
Despite Zhongrui's large cash holdings of RMB9.4 billion
at 30 September 2017, Moody's expects that over the next 1-2
years, net debt/EBITDA will increase to 5.0x-5.5x
and EBITDA/interest coverage will register 1.8x-2.0x.
Such levels position the company at the mid-B rating level.
The B2 rating is also constrained by the fact that the company's businesses
are operated by private companies, which are subject to fewer requirements
on corporate governance and transparency than listed companies.
Zhongrui's liquidity profile is weak, due to its high level
of short-term debt totaling RMB12.8 billion (including notes
payable of RMB1.4 billion) as of September 2017, mainly for
its coal trading business, and its weak access to the equity and
debt markets when compared with listed companies.
Zhongrui's B3 senior unsecured debt rating is one notch lower than
its CFR, due to structural subordination risk. The majority
of claims are at the operating subsidiaries and have priority over unsecured
claims at the holding company in a bankruptcy scenario. In addition,
the holding company lacks significant mitigating factors to reduce structural
subordination risk for its unsecured debt holders. As a result
of these factors, the likely recovery rate for claims at the holding
company will be lower.
The ratings outlook is stable, reflecting Moody's expectation
that the company will continue to progressively grow its property development
and coal solution businesses, and maintain access to bank funding
to refinance its short-term debt and support its business expansion.
Upward ratings pressure could emerge, if Zhongrui reduces its debt
leverage, improves its liquidity position, and broadens its
funding access.
Credit metrics that would indicate upward ratings pressure include:
(1) net debt/EBITDA below 4.0x-4.5x; (2) EBITDA/interest
above 2.5x; and (3) cash/short-term debt above 100%
on a sustained basis.
Downward ratings pressure could emerge if the company's contracted sales,
cash flow, credit metrics or liquidity position deteriorate.
Credit metrics indicative of downward ratings pressure include:
(1) net debt/EBITDA above 5.5x; (2) EBITDA/interest below
1.5x; or (3) cash/short term debt below 50% on a sustained
basis.
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.
Zhengzhou Zhongrui Industrial Group Co., Ltd is a privately
owned enterprise engaged in two major businesses: coal solution
and property development. The company is 70% owned by Mr.
Wan Yongxing, the founder and chairman, and 30% by
Mr. Liu Yi.
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.
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.
Kaven Tsang
VP - Senior Credit Officer
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
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
