Hong Kong, March 07, 2022 -- Moody's Investors Service has changed Jiangsu Zhongnan Construction Grp
Co., Ltd.'s (Jiangsu Zhongnan) and Haimen Zhongnan
Investment Development (International) Co., Ltd.'s
(Haimen Zhongnan) rating outlooks to negative from stable.
At the same time, Moody's has affirmed Jiangsu Zhongnan's B2 corporate
family rating (CFR) and the B3 senior unsecured rating on the bonds issued
by Haimen Zhongnan and guaranteed by Jiangsu Zhongnan.
"The change in outlook to negative reflects Jiangsu Zhongnan's weakening
sales and credit, which will weakly position the company at the
B2 level," says Daniel Zhou, a Moody's Analyst.
Moody's also expects the company's tight access to funding
and use of internal cash for debt repayment will reduce its liquidity
buffer.
"However, the rating affirmation reflects our expectation that Jiangsu
Zhongnan will maintain adequate liquidity to address its refinancing needs
over the next 6-12 months," adds Zhou.
RATINGS RATIONALE
Moody's expects Jiangsu Zhongnan's operating and credit metrics
to weaken over the next 6-12 months due to difficult operating
and funding conditions.
Specifically, Zhongnan's contracted sales will decline 20%-25%
over the next 6-12 months, after a 12% fall in 2021.
This weak performance will reduce the company's operating cash flow
and, in turn, pressure the company's profit margins,
credit metrics and liquidity.
In 2021, the company's contracted sales decreased 12%
to RMB197.4 billion, with a considerable 46% year-over-year
reduction in the fourth quarter. This performance is weaker than
many of its Chinese property peers'.
Moody's also estimates Jiangsu Zhongnan's gross profit margin
will drop to around 10% over the next 12-18 months from
17% in 2020 because the rating agency expects the company to offer
price discounts to boost sales and due to rising material costs for its
construction business.
As a result, its EBIT/interest will reduce to 1.5x-1.6x
over the next 12-18 months from 2.4x for the 12 months ended
June 2021. This ratio weakly positions the company at the B2 level.
Moody's expects Jiangsu Zhongnan's liquidity to remain adequate
and enable the company to utilize internal cash to repay its maturing
debt over the next 12 months. Specifically, the company will
have RMB5.7 billion bonds maturing or becoming puttable before
the end of June 2023, including USD223 million of offshore bonds
maturing in June 2022 and USD240 million of offshore bonds becoming puttable
in April 2023.
However, the company's continued usage of internal resources
to repay debt will deplete its liquidity buffer if it is unable to secure
other funding channels over the next 6-12 months.
Jiangsu Zhongnan's total cash balance declined to RMB23 billion
as of the end of September 2021, from RMB33 billion as of the end
of 2020. Moody's estimates that the company's cash
balance would likely reduce at a similar pace as of the end of 2021.
Meanwhile, its adjusted debt fell to RMB82 billion as of the end
of September 2021, from RMB93 billion as of the end of 2020.
Jiangsu Zhongnan's B2 CFR also reflects its sizable operating scale and
track record in the Yangtze River Delta region.
However, Jiangsu Zhongnan's B2 rating is constrained by its high
exposure to trust borrowings, significant exposure to lower-tier
cities, the low profitability of its construction and property development
businesses, and its high exposure to joint ventures (JV).
The B3 senior unsecured debt rating is one notch lower than Jiangsu Zhongnan's
B2 CFR due to structural subordination risk. The subordination
risk refers to the fact that the majority of Jiangsu Zhongnan's claims
are at its operating subsidiaries and, in the event of a bankruptcy,
have priority over claims at the holding company. In addition,
the holding company lacks significant mitigating factors for structural
subordination. Consequently, the expected recovery rate for
claims at the holding company will be lower.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the company's concentrated ownership by Zhongnan
Urban Construction Investment Co., Ltd., which
had a 54.12% stake in the company as of 29 January 2022,
and the risks posed by its shareholder's share pledge financing.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the rating is unlikely in the near term, given the
negative rating outlook.
However, the rating outlook could return to stable if the company
(1) improves its liquidity and demonstrates its ability to access funding
by refinancing its onshore and offshore debt maturing over the next 6-12
months, as well as (2) increases its profit margin and EBIT interest
coverage, with the latter staying above 1.5x-1.75x
consistently.
On the other hand, Moody's could downgrade Jiangsu Zhongnan's rating
if the company suffers further declines in contracted sales, or
if its liquidity or access to funding further deteriorates.
Credit metrics indicative of a downgrade include EBIT/interest coverage
falling below 1.5x and unrestricted cash/short-term debt
dropping below 1.0x, both on a sustained basis.
The rating could also be downgraded if the contingent liabilities associated
with the company's JVs or the likelihood of it providing funding support
to the JVs increases significantly. This could arise from a substantial
increase in the company's investments in new JV projects.
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.
Jiangsu Zhongnan is based in China's Jiangsu Province and principally
engages in property development and construction services. The
company had a total land bank of around 47.4 million square meters
as of June 2021.
Jiangsu Zhongnan was founded by Chen Jinshi, who has been in China's
construction business since 1988 when he established the company.
The company was listed on the Shenzhen Stock Exchange in 2009.
REGULATORY DISCLOSURES
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Yiwei Daniel Zhou
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Franco Leung
Associate Managing Director
Corporate Finance Group
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Releasing Office:
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