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Rating Action:

Moody's assigns first-time Ba3 CFR to China Fortune Land; outlook stable

 The document has been translated in other languages

06 Jan 2020

Hong Kong, January 06, 2020 -- Moody's Investors Service has assigned a first-time Ba3 corporate family rating (CFR) to China Fortune Land Development Co., Ltd. (CFLD).

At the same time, Moody's has assigned a Ba3 senior unsecured rating to the proposed USD notes to be issued by CFLD (Cayman) Investment Ltd., an indirectly wholly owned subsidiary of CFLD. The notes will be unconditionally and irrevocably guaranteed by CFLD.

The ratings outlook is stable.

The proceeds from the note issuance will be used by CFLD for debt refinancing.

RATINGS RATIONALE

"CFLD's Ba3 CFR reflects its standalone credit strength and a one-notch rating uplift, reflecting our assessment that Ping An Life Insurance Company of China, Ltd., CFLD's second-largest shareholder with a 25.16% stake, could provide extraordinary support to CFLD in times of need," says Josephine Ho, a Moody's Vice President and Senior Analyst.

Ping An Life, which is the second-largest life insurer in China by original premium income, is 99.5% owned by Ping An Group and the life insurance arm of the group.

The one-notch uplift reflects Moody's assessment that Ping An Life could support CFLD in times of financial stress based on (1) the track record of financial support from Ping An Life to CFLD since its investment in August 2018, (2) its active role in CFLD's operational and financial management, and (3) CFLD's established integrated industrial park business, which is complimentary to Ping An Group's real estate businesses.

However, the uplift is limited to one notch, given that Ping An Life is still the second-largest shareholder after the founding shareholder, Mr. Wen-Xue Wang.

Under the ownership of Ping An Life, Moody's expects CFLD will enhance its management capability, business planning, financial management on debt and operating cash flow, and access to bank financing and the capital markets.

"CFLD's standalone credit strength reflects its strength in executing a business model of industrial park-cum-residential property development," says Ho, who is also Moody's Lead Analyst for CFLD.

CFLD provides industrial park planning and development services to local governments through public-private partnerships. The development services include primary land development, infrastructure construction and business investment referrals. The company also manages industrial parks.

At 30 June 2019, CFLD had 78 industrial parks in operation, under planning or construction across municipals surrounding tier 1 and strong tier 2 cities in China. The company is gradually expanding to central China and the Yangtze River Delta, areas beyond its home base in the Beijing-Tianjin-Hebei region.

CFLD's residential property development is primarily focused on mass-market projects within or surrounding the industrial parks it has developed.

Such a business model offers the company low land costs and non-residential property development profits, which help to reduce somewhat the revenue volatility from its residential property development business, with the latter offering presales cash inflow.

However, CFLD's standalone credit strength is constrained by the company's (1) small land bank that requires annual spending, and (2) moderately high level of debt leverage.

The company's high debt levels are contributed by its (1) fast growth business plan, (2) the long cash conversion cycle of its industrial park business, and (3) the slow cash collections from its residential property business, due to tight regulatory controls in the Beijing-Tianjin-Hebei region.

Moody's expects that CFLD will gradually improve its debt leverage over the next two years. The company's debt leverage — as measured by revenue/adjusted debt — will likely register around 55% in 2020 and 63% in 2021 compared with 56% in 2018. During the same two-year period, the company's interest coverage — as measured by adjusted EBIT/interest — should stay at 3.0x-3.5x, which would support its standalone credit profile.

The forecast improvement in debt leverage is based on Moody's expectation that CFLD's revenue will grow around 30% over the next 12-18 months, supported by 10%-20% growth in CFLD's contracted sales over the past three years, and an around 30% growth in industrial development services.

Moody's also expects an improvement in CFLD's cash collection for its residential property sales over the next 12-18 months, because CFLD has adopted a more stringent financial policy and discipline after Ping An Life became its second-largest shareholder. In addition, CFLD's expansion beyond the Beijing-Tianjin-Hebei region reduces the company's exposure to regulatory risks and improves its cash collection.

With regards to governance risk, Moody's has considered the ownership concentration by its controlling shareholder, Mr. Wen-Xue Wang, who collectively with persons acting in concert, held a 37.17% stake in the company at the end of November 2019, with 62% of this stake pledged as of the same date. This risk is partly mitigated by the presence of Ping An Life, which owns a 25.16% stake, and two seats on the board of directors out of a total of nine; providing corporate governance oversight. Ping An Life will also help to improve the operation and financial management of the company.

CFLD's liquidity is adequate, with reported cash/short-term debt of 2.42x--1.76x during 2016--2018. The company reported a cash balance of RMB55 billion at 30 June 2019. Moody's expects the company's cash holdings, together with its contracted sales proceeds after deducting basic operating cash flow items, will be adequate to meet its maturing debt over the next 12 months.

CFLD Cayman's senior unsecured rating is unaffected by subordination risk from claims at the operating companies, because Moody's expects financial support from Ping An Life to flow through the holding company of CFLD rather than directly to the main operating companies, thereby mitigating any differences in expected loss that could result from structural subordination.

The stable ratings outlook reflects Moody's expectation that (1) CFLD will gradually improve its debt leverage and cash collection, while growing its contracted sales and industrial development service revenues, and (2) Ping An Life will remain an important shareholder and continue to provide operational and financial oversight and support.

CFLD's ratings could come under upgrade pressure if the company (1) increases in scale through growing its residential property and industrial park businesses, (2) maintains good liquidity, and (3) improves its credit metrics, such that revenue/adjusted debt exceeds 75%-80% and EBIT/interest exceeds 3.5x, both on a sustainable basis.

On the other hand, CFLD's ratings could be under downgrade pressure if the company (1) shows a decline in contracted sales and/or revenues from its industrial park business, (2) cannot improve its debt leverage, such that revenue/adjusted debt stays below 50% by the end of 2020 and 60% by the end of 2021, or (3) shows a weakening in its liquidity position.

Any material reduction in ownership by Ping An Life or signs of weakening support from Ping An Life would also trigger downgrade pressure on CFLD's ratings.

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.

China Fortune Land Development Co., Ltd. was established in 1998 and listed on the Shanghai Stock Exchange in 2011. The company engages in residential property development and the investment and operation of integrated industrial parks. The company's industrial park businesses include primary land development, infrastructure development and construction, industry development services, and property management and public services.

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.

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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.

Josephine Ho
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

No Related Data.
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