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Rating Action:

Moody's changes China Aoyuan's outlook to stable from positive; affirms ratings

 The document has been translated in other languages

19 Apr 2021

Hong Kong, April 19, 2021 -- Moody's Investors Service has changed the rating outlook on China Aoyuan Group Limited to stable from positive.

At the same time, Moody's has affirmed China Aoyuan's B1 corporate family rating (CFR) and B2 senior unsecured rating.

"The change in outlook to stable from positive reflects China Aoyuan's weaker-than-expected 2020 financial metrics and our expectation that the company's slowly improving credit metrics will be more consistent with a B1 CFR over the next 12-18 months," says Celine Yang, a Moody's Assistant Vice President and Analyst.

Specifically, China Aoyuan's debt leverage remains high. Its adjusted debt increased 35% to RMB140 billion as of end of 2020, significantly higher than our previous expectation. However, Moody's expects the company to gradually reduce debt in 2021 and 2022.

"The rating affirmation reflects our expectation that the company will maintain good liquidity and access to onshore and offshore funding channels, while achieving stable growth in contracted sales and revenue over the next 12-18 months," adds Yang.

RATINGS RATIONALE

China Aoyuan's B1 CFR continues to reflect its (1) strong execution capability even during previous down cycles; (2) established brand in the economically strong Guangdong Province; and (3) good access to onshore and offshore funding.

On the other hand, the B1 CFR is constrained by China Aoyuan's high debt leverage, and modest debt capital structure, given its relatively large short-term debt, at 46% of its total reported debt as of the end of 2020.

Moody's forecasts China Aoyuan's debt leverage - as measured by revenue/adjusted debt - will continue to improve to 60%-66% over the next 12-18 months from 48% in 2020. This will be driven by the company's gradual debt reduction and improved revenue recognition from strong contracted sales growth over the past one to two years. Similarly, China Aoyuan's adjusted EBIT/interest coverage will improve to about 2.5x-2.8x over the same period from 2.3x in 2020. These key credit metrics are appropriate for its B1 CFR when compared with rated peers.

China Aoyuan has rapidly grown its minority interest and provided guarantees to joint ventures (JV) and associates as a result of its increased partnership for its development projects, including its urban redevelopment businesses. Such a strategy could add uncertainty to its control over project cash flow and weaken the transparency of its contingent liabilities.

Moody's also expects the company to prudently pursue growth and use internal resources to reduce debt over the next one to two years. As a result, its total adjusted debt will likely decrease slightly to RMB130 billion-RMB 135 billion over the coming 12-18 months from RMB140 billion as of December 2020.

The company's B2 senior unsecured debt rating is one notch lower than the CFR, due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over China Aoyuan's senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.

China Aoyuan's liquidity position is good. The company's cash balance of RMB70.0 billion as of the end of 2020 covers 134% of its short-term debt. Such cash holdings, together with the company's operating cash flow, will be sufficient to cover its short-term debt and estimated committed land payments over the next 12-18 months.

With respect to governance risk, China Aoyuan's B1 CFR incorporates the company's concentrated ownership by its key shareholders, Guo Zi Wen and Guo Zi Ning, who held a total 55.2% stake in the company as of 29 March 2021. Moody's has considered the presence of internal governance structures and disclosure standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. The company has three special committees, namely an audit committee, remuneration committee and nomination committee. All these committees are either chaired or dominated by independent nonexecutive directors and exercise supervision over the company. In addition, the company has a stable dividend policy, with a dividend payout of around 35%-40% of its net profit for the year attributable to owners of the company over the past three years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade China Aoyuan rating if the company (1) sustainably grows its contracted sales and revenue through the cycles without sacrificing its profitability; (2) maintains a prudent approach to its land acquisitions and financial management; (3) improves its credit metrics, such that its EBIT/interest registers 2.5x-3.0x and revenue/adjusted debt improves to 70%-75% on a sustained basis; and (4) maintains good liquidity, such that its cash on hand consistently covers its short-term debt and there is sufficient capacity under its maintenance covenants for bank loans.

China Aoyuan's rating could be downgraded if growth in its contracted sales deteriorates, or if the company's credit metrics weaken, such that its (1) EBIT interest coverage falls below 2.0x; (2) revenue/adjusted debt fails to trend towards 60%; or (3) liquidity weakens, with its cash holdings slipping below 1.0x of short-term debt.

Any signs of weakening liquidity or access to funding would also be negative for the company's rating.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China Aoyuan Group Limited is one of the leading property developers in China focusing on the development of mass-market properties. In March 2019, China Aoyuan spun off its property management arm, Aoyuan Healthy Life Group Company Limited. (Aoyuan Healthy Life), which was listed on Hong Kong Stock Exchange.

As of 31 December 2020, the company had property projects in China, Australia, Canada, Hong Kong and Macao, with a total land bank of about 57.2 million square meters in gross floor area, which can cover around three years of property development.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

YuYing (Celine) Yang
Asst Vice President - 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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