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Rating Action:

Moody's assigns first-time B2 corporate family rating to Jiayuan International; outlook stable

 The document has been translated in other languages

25 Sep 2017

Hong Kong, September 25, 2017 -- Moody's Investors Service has assigned a first-time B2 corporate family rating to Jiayuan International Group Limited. The rating outlook is stable.

RATINGS RATIONALE

"Jiayuan's B2 rating reflects its established track record in its core markets -- Nanjing, Yangzhou and Taixing -- in Jiangsu Province, low-cost land bank, and focus on mass-market housing, as well as management's demonstrated abilities in identifying quality land," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

These strengths will support the company's execution of its business growth plan and provide it with pricing flexibility, if the property markets in Jiangsu Province weaken.

Jiayuan has kept its unit land acquisition cost at below 20% of its average selling price over the past three years, supporting a high gross margin of 34% in 2016.

Its strategy of focusing on mass-market housing and end-users would also lower the company's exposure to the risk of regulatory controls targeting investors.

Jiayuan achieved a strong 67% year-on-year growth in contracted sales to RMB4.8 billion in the first eight months of 2017 after showing 21.6% year-on-year growth in 2016.

"Jiayuan's rating is also constrained by its small operating scale, high geographic concentration in Jiangsu Province, the execution risks associated with its fast growth plan in the next 1-2 years, and its weak liquidity," adds Tsang, also Moody's lead analyst for Jiayuan.

Its small and Jiangsu-centric operation mean that the company's business performance is highly dependent on the sales and completion of a small number of key projects, as well as the state of housing demand, the availability of bank credit, and the regulatory environment in Jiangsu Province.

Moody's notes that Jiayuan's four major markets - Nanjing, Taixing, Nantong and Yangzhou in Jiangsu -- accounted for more than 80% of the company's contracted sales in the first seven months of 2017.

Additionally, the company has a high exposure to low-tier cities (cities other than Nanjing and Yangzhou) in Jiangsu, which accounted for around 74% of its land bank as of June 2017.

Moody's believes the availability of bank credit in low-tier cities will be more affected than major cities if the banks tighten lending to the property sector, which in turn will affect the company's sales.

While Jiayuan's expansion into new cities -- Shenzhen, Hainan and Macau -- will gradually improve its geographic diversification, the fast pace of expansion and the entry into multiple cities in a short time frame entail execution risks and high funding needs.

Moody's expects Jiayuan's leverage will rise as a result, with projected revenue/adjusted debt falling to 45%-50% at the end of 2017 from 60% at the end of June 2017 and 58% at the end of December 2016 due to its debt-funded growth.

But the ratio will recover to around 55% by the end of 2018 when the company's revenues increase, supported by its higher contracted sales.

Moody's also expects the high profit margin and lower funding costs after its IPO in 2016 will partly mitigate the effect of higher borrowings. As a result, Jiayuan's projected EBIT/interest will stay at 2.6x-3.0x in the next 12-18 months, versus 2.9x for the 12 months ended June 2017 and 2.4x in 2016.

Nevertheless, Moody's believes Jiayuan's projected financial metrics are appropriate for its B2 CFR.

Jiayuan has to seek new financing to support its liquidity. Its cash holding of RMB3.3 billion at the end of June 2017 is insufficient to cover payments of RMB4.8 billion for its committed land acquisitions and the high refinancing needs for its short-term debt of RMB2.2 billion.

On the other hand, Moody's notes that Jiayuan's cash/short-term debt coverage strengthened to 1.6x at the end of June 2017 from 0.4x at the end of 2016 due to its growing contracted sales and equity issuance in June 2017. Its cash holding was RMB1.4 billion at the end of 2016.

Jiayuan's stable rating outlook reflects our expectation that (1) the company will grow sales as planned, and (2) it will adjust its speed of expansion in accordance with market conditions and maintain adequate liquidity by improving its funding channels and strengthening its banking relationships both onshore and offshore.

Upward rating pressure could emerge if Jiayuan (1) materially grows its scale and geographic coverage with financial discipline; (2) builds up its brand in new locations outside its home market; (3) maintains strong liquidity with cash/short-term debt coverage of over 1.5x, and (4) improves its financial metrics with EBIT/interest coverage consistently above 3.0x and revenue/adjusted debt over 70%-75% on a sustained basis.

Downward rating pressure could emerge if (1) Jiayuan's liquidity profile weakens materially ; (2) contracted sales or revenue fall short of our expectations or profit margins substantially decline, which in turn affects interest coverage and financial flexibility; or (3) the company engages in material debt-funded acquisitions.

Metrics indicative of downward rating pressure include Jiayuan's cash falling below 1x of short-term debt, or the company's EBIT/interest coverage weakening below 1.5x on a sustained basis.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Jiayuan International Group Limited develops mass-market residential properties mainly in Jiangsu Province. The company had a total land bank of around 6.9 million square meters (sqm) across 11 cities at the end of June 2017. Mr. Shum Tin Ching is the chairman, holding a 60.81% stake as of June 2017.

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

No Related Data.
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