Hong Kong, March 07, 2022 -- Moody's Investors Service has revised the rating outlook of Guangzhou
Fineland Real Estate Development Co., Ltd. to negative
from stable.
At the same time, Moody's has affirmed Fineland's B2 corporate
family rating (CFR) and B3 senior unsecured rating.
"The negative outlook reflects Fineland's worsening sales and credit
metrics over the next 6-12 months due to weak market conditions
and a potential delay in the company's launch of urban redevelopment
projects (URPs)," says Alfred Hui, a Moody's Analyst.
"The affirmation of the rating reflects our expectation that the company
will maintain adequate liquidity and a disciplined approach in its business
development," adds Hui.
RATINGS RATIONALE
Moody's expects Fineland's contracted sales to decline over the
next 6-12 months, driven by weaker homebuyer confidence amid
tight funding conditions. Evolving regulations over investments
in URPs could also delay its project launches, further pressuring
its sales growth. Its projected weak sales performance will also
weigh on the company's operating cash flow, credit metrics
and liquidity.
In 2021, the company's contracted sales declined 27%
year-on-year to RMB12.2 billion, due to weak
market conditions and some delays in its launch of URPs in Guangzhou.
Moody's expects Fineland's debt leverage, as measured
by revenue/adjusted debt, to worsen to 40%-45%
over the next 12-18 months from 53% for the 12 months ended
June 2021 on expected lower revenue. Similarly, its interest-servicing
ability, as measured by EBIT/interest coverage, will fall
to 1.5x-1.7x from 1.8x over the same period
because of expected declines in revenue and profit margins. These
ratios will position the company at the weaker end of the B2 CFR.
However, Moody's expects Fineland to maintain adequate liquidity.
The company has RMB918 million of onshore bonds that will be puttable
in December 2022 and had unrestricted cash of RMB5.8 billion as
of June 2021. While Fineland will have to keep part of the cash
at the project level to support its operations, Moody's expects
the company to have sufficient resources, including cash and operating
cash flow, to service its maturing debt at the holding and operating
company levels over the next 6-12 months. Still, the
upcoming debt repayment by internal cash sources will reduce the funding
available for its operations over the next 12-18 months.
Fineland's B2 CFR reflects its long track record of property development
and established brand in Guangdong Province and its adequate liquidity.
On the other hand, the CFR is constrained by the company's (1) small
scale and geographic concentration in Guangdong province, and (2)
weak credit metrics.
The B2 CFR also takes into account Fineland's private company status,
as its information disclosure and corporate governance are less transparent
than that of its listed peers.
Fineland's B3 senior unsecured bond rating is one notch lower than
its CFR because of the risk of structural subordination. This subordination
risk reflects the fact that most of Fineland's claims are at the
operating subsidiaries and have priority over claims at the holding company
in a bankruptcy scenario. In addition, the holding company
lacks significant mitigating factors for structural subordination.
As a result, the expected 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,
as the chairman owns 100% of the company. Moody's
has also considered the low level of related party transactions relative
to Fineland's scale over the past 3 years, as well as the
management's ability to operate the company through various industry
cycles for the past two decades.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Fineland's ratings is unlikely in the near term,
given the negative outlook.
However, Moody's could revise the outlook to stable if Fineland
can grow its contracted sales, as well as improve its credit metrics
and liquidity.
Credit metrics that could indicate a stable rating outlook include EBIT/interest
above 2.0x and unrestricted cash/short-term debt above 1.0x
on a sustained basis.
On the other hand, Moody's could downgrade Fineland's ratings
if the company's contracted sales, profitability, credit
metrics or liquidity weaken or if the company purses aggressive expansion.
Credit metrics indicating a downgrade include EBIT/interest coverage falling
below 1.5x-2.0x, or liquidity weakening,
as reflected by unrestricted cash/short-term debt decreasing below
1.0x.
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 1995, Guangzhou Fineland Real Estate Development Co.,
Ltd. is a property developer based in Guangdong Province targeting
mid to high-end customers. The company adopts Eastern-style
design within its development to cater for different customers.
As of the end of 2021, the company was wholly owned by Fang Ming,
who is also the founder and chairman of the company.
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Alfred Hui
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.)
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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
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JOURNALISTS: 852 3758 1350
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