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Rating Action:

Moody's assigns first-time B2 to LVGEM; outlook stable

 The document has been translated in other languages

03 Aug 2017

Hong Kong, August 03, 2017 -- Moody's Investors Service has assigned a first-time B2 corporate family rating to LVGEM (China) Real Estate Investment Company Limited and a B3 backed senior unsecured rating to the proposed USD notes to be issued by Gemstones International Limited, a wholly owned subsidiary of LVGEM. The proposed notes will be guaranteed by LVGEM.

The ratings outlook is stable.

The proceeds from the proposed issuance will be used for general corporate purposes and new project acquisitions.

RATINGS RATIONALE

"LVGEM's B2 corporate family rating reflects the company's strong profitability and track record of executing urban redevelopment projects in Shenzhen," says Chris Wong, a Moody's Analyst.

LVGEM has maintained high profitability over the past three years when compared with its Chinese property peers. Its reported gross margins stood at 46%-53% in 2014-2016.

LVGEM's strong profitability is primarily a result of its low-cost land bank, benefiting from its urban redevelopment projects in Shenzhen.

The company has a track record of around 20 years of urban redevelopment projects in Shenzhen. In particular, 10 of LVGEM's 13 completed projects in Shenzhen involved urban redevelopment.

Moody's expects that Shenzhen will continue to be a major sales and revenue contributor to LVGEM over the next two years, because more than 90% of the company's sellable resources in terms of value will be contributed by its Shenzhen projects during this period.

LVGEM's B2 rating also reflects the company's stable recurring rental income from its investment properties.

The company holds and operates a portfolio of quality commercial properties with a total gross floor area (GFA) of around 399,864sqm, primarily located in Shenzhen. Its investment properties provide LVGEM with a stable stream of cash flow to support its property development business.

Its investment portfolio generated gross rental income of RMB430 million in 2016, which covered around 0.7x of its gross interest expense during the year. Moody's expects that the recurring income from this portfolio will rise over the next few years, which will enhance the stability of its operating cash flow and interest coverage.

On the other hand, the rating is constrained by the company's volatile property development operating performance. LVGEM achieved RMB827 million in contracted sales in 2016, down from RMB3.38 billion in 2015 and RMB1.20 billion in 2014.

Moody's expects that the company's contracted sales will increase to RMB4.5-RMB8.5 billion over the next 12-18 months, primarily from two sizable projects in Shenzhen. Such volatility in sales performance is mainly driven by LVGEM's small number of projects.

The rating also considers the likely volatility of LVGEM's financial profile, as a result of potential project injections from the company's controlling shareholder, Mr. Wong Hong King.

Mr. Wong currently holds a number of urban redevelopment projects located in Shenzhen, Zhuhai and Dongguan, with a total GFA of around 12 million sqm. Some of these projects will likely be gradually injected into LVGEM.

Due to the uncertainty over the timing and funding structure of such injections, as well as the large funding requirements for the development of these projects, Moody's expects that LVGEM's credit metrics will remain volatile over the next few years.

Moody's expects that LVGEM's adjusted debt/capitalization will increase to 60%-65% over the next 12-18 months from 51% in 2016, because capital expenditures relating to these injected projects are likely to be partly debt funded.

At the same time, its EBIT/interest should weaken to around 2.4x-2.5x over the next 12-18 months from 3.4x in 2016, due to the company's likely increase in debt levels. But its profitability will remain strong and comparable to its B-rated Chinese property peers.

LVGEM's liquidity profile was inadequate at end-2016. We expect that the company's cash on hand of RMB4.5 billion and operating cash flow will not be sufficient to cover its maturing debt of RMB3.6 billion and committed land payments of around RMB1.9 billion over the next 12 months.

Nevertheless, Moody's believes LVGEM has good access to funding, which will support its refinancing of short-term debt. In addition, the company can use its investment properties to obtain additional long-term financing, because some of these properties are currently unpledged.

The company's liquidity position will also improve upon the successful issuance of its offshore bonds.

The B3 rating of LVGEM's backed senior unsecured notes is one notch lower than its corporate family rating, reflecting structural and legal subordination risk. The ratio of secured debt to total assets was at around 33% at end-2016. Moody's expects that ratio to remain above 30% over the next 12-18 months.

The ratings outlook is stable, reflecting Moody's expectation that LVGEM will continue to adopt a disciplined approach to expansion and maintain a stable recurring income stream.

Upgrade ratings pressure could emerge over the medium term, if LVGEM: (1) successfully implements its sales plan; (2) expands its scale through increasing its number of projects to enhance cash flow stability and diversification; (3) maintains prudent practices in its land acquisitions and financial management; (4) maintains good liquidity, such that cash consistently covers short-term debt.

Credit metrics that could trigger an upgrade include: (1) EBIT/interest coverage above 2.5x-3.0x; and/or (2) adjusted debt/capitalization below 45%-50% on a sustained basis.

However, the ratings could be downgraded if: (1) LVGEM's contracted sales or revenues fall short of Moody's expectations; (2) the company engages in aggressive land acquisitions or material expansion funded by debt; and/or (3) its liquidity profile weakens materially.

Credit metrics indicative of downward ratings pressure include: (1) adjusted EBIT/interest coverage below 1.5x; or (2) cash to short-term debt below 1.0x 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.

LVGEM (China) Real Estate Investment Company Limited is a commercial and residential property developer and hotel operator, with a focus on redevelopment projects in Shenzhen.

The company listed on the Hong Kong Stock Exchange in November 2015. At end-2016, LVGEM's attributable land bank totaled around 4.1 million sqm, situated in Shenzhen, Hong Kong, Zhuhai, Suzhou, and Maoming.

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.

Chris Wong
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

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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