Hong Kong, May 25, 2021 -- Moody's Investors Service has changed the rating outlook on China
SCE Group Holdings Limited (China SCE) to positive from stable.
At the same time, Moody's has affirmed China SCE' B1 corporate
family rating (CFR) and its B2 senior unsecured debt rating.
"The change in outlook to positive reflects our expectation that China
SCE will improve its debt leverage and continue to expand over the next
12-18 months," says Danny Chan, a Moody's Assistant
Vice President and Analyst.
"At the same time, the rating affirmation reflects our expectation
that the company will maintain its financial discipline, good liquidity
and access to onshore and offshore capital markets while growing its investment
property portfolio over the next 12-18 months," adds Chan.
RATINGS RATIONALE
China SCE's B1 CFR reflects the company's long operating track record,
growing operating scale with diversified geography and well-located
land bank, as well as good liquidity and good access to onshore
and offshore funding.
At the same time, China SCE's CFR considers its funding needs and
execution risks associated with its fast expansion and growing investment
property portfolio, as well as its increased exposure to joint ventures
(JVs).
Moody's expects China SCE to continue increasing its contracted
sales to RMB115 billion-RMB120 billion in 2021 and RMB125 billion-RMB130
billion in 2022 after achieving 26% growth to RMB101.5 billion
in 2020. The projected sales growth will be driven by China SCE's
sizable and well-located land bank, as well as its strong
sales execution. This will also support the company's liquidity
and revenue growth.
Moody's forecasts China SCE's debt leverage -- as measured
by revenue/adjusted debt -- will improve and trend towards
70% over the next 12-18 months after improving to 61%
in 2020 from 43% in 2019. This is because the likely revenue
growth, due to the company's strong contracted sales over
the past 2-3 years, will more than offset the debt increase
for its property development and investment businesses, as well
as growing financial guarantees to JVs.
The improvement in debt leverage also reflects Moody's expectation
that China SCE will maintain financial discipline in managing its expansion
amid China's tightened credit environment.
However, China SCE's EBIT/interest coverage will stay at 2.5x-3.0x
over the same period, after strengthening to 2.9x in 2020
from 2.2x in 2019. This is because EBIT will remain flat
as revenue growth will be largely offset by a likely margin decline,
to around 21% from 24% during the same period, due
to increasing land costs and restrictions on property selling prices in
many of its key markets.
China SCE's liquidity position remains good. The company's cash
balance of RMB23.4 billion as of the end of 2020 covered 169%
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.
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 SCE'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.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the company's concentrated ownership by its controlling
shareholder, Mr. Wong Chiu Yeung, who held a 50.05%
stake as of 31 December 2020.
Moody's has also considered (1) the presence of three independent
nonexecutive directors on the board, who also chair the audit and
remuneration committees; (2) China SCE's moderate 20%-25%
dividend payout ratio over the past three years; and (3) the presence
of other internal governance structures and standards as required under
the Corporate Governance Code for companies listed on the Hong Kong Stock
Exchange.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if China SCE demonstrates stable sales
growth and increases its scale, maintains healthy profitability,
controls its investment and land acquisition budgets and improves its
EBIT/interest coverage to more than 2.5x-3.0x and
revenue/adjusted debt to more than 70%-75% on a sustained
basis.
A rating downgrade is unlikely, given the positive outlook.
However, Moody's could revise China SCE's outlook to stable if (1)
its contracted sales weaken; (2) its profit margins decline significantly;
(3) its liquidity becomes impaired, such that cash/short-term
debt falls below 1.0x; or (4) its debt leverage increases
materially, such that EBIT/interest coverage falls under 2.5x-3.0x
and revenue/adjusted debt stays below 65%-70% on
a sustained basis.
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.
Founded in 1996, China SCE Group Holdings Limited listed on the
Hong Kong Stock Exchange in February 2010. It was 50.05%
owned by its chairman, Mr. Wong Chiu Yeung, as of 31
December 2020.
As of 31 December 2020, the company had a total land bank of around
37.68 million square meters in terms of gross floor area,
with nationwide coverage in different tiers of cities across various regions
in China.
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.
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Danny Chan
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
