Hong Kong, March 29, 2021 -- Moody's Investors Service has revised to positive from stable the
rating outlook of Zhongliang Holdings Group Company Limited (Zhongliang).
At the same time, Moody's has affirmed Zhongliang's B1 corporate
family rating (CFR) and its B2 senior unsecured debt rating.
"The change in outlook to positive from stable reflects our expectation
that Zhongliang's credit metrics will continue to be strong over the next
12-18 months for its B1 CFR, supported by its solid revenue
growth and controlled debt growth," says Cedric Lai, a Moody's
Vice President and Senior Analyst.
Specifically, Zhongliang's revenue growth will be driven by its
strong sales execution. Total contracted sales grew 11%
year over year to RMB168.8 billion for 2020, despite the
negative impact from the coronavirus outbreak. This comes after
the company's contracted sales grew 50% year over year to RMB152.5
billion for 2019.
"At the same time, the rating affirmation reflects our expectation
that the company will maintain its financial discipline and good liquidity
position over the next 12-18 months," adds Lai.
RATINGS RATIONALE
Zhongliang's B1 CFR reflects the company's (1) recognized
brand name in second-tier and lower-tier cities in the Yangtze
River Delta region; (2) strong sales execution, as reflected
by its rapid annual contracted sales growth in the past three years;
and (3) solid credit metrics and good liquidity.
On the other hand, Zhongliang's rating is constrained by its
relatively high exposure to lower-tier cities and reliance on non-bank
financing. In addition, the company has a material exposure
to joint venture (JV) businesses, which hinders the transparency
of its credit metrics.
Moody's expects Zhongliang's debt leverage -- as measured
by revenue/adjusted debt -- will continue to be strong at
95%-100% over the next 12-18 months from 99%
in 2020. This is driven by Moody's expectation of Zhongliang's
strong revenue recognition, as well as its disciplined approach
to pursuing growth and controlling debt increase.
Meanwhile, Moody's expects Zhongliang's EBIT/interest coverage will
improve to about 3.0x over the same period from 2.8x in
2020, supported by revenue growth and declining interest costs.
These metrics alone are strong compared with many of its B1 rated peers.
In addition, Moody's expects its gross profit margin to stay
flat at around 21% over the next 12-18 months, given
rising land costs will temper an increase in its average property selling
prices.
Moody's believes Zhongliang's sizable salable resources, strong
sales execution and solid housing demand in the company's core markets
will enable its contracted sales to grow to RMB175 billion-RMB185
billion annually in 2021 and 2022. Such contracted sales growth
will help fund the company's business expansion and support revenue growth
and liquidity 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 Zhongliang'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.
Zhongliang's liquidity position is good. The company's cash balance
of RMB34.2 billion as of the end of 2020 covered 144% 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.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the risk associated with the ownership concentration
in Zhongliang's controlling shareholders, Mr. Yang
Jian and his spouse, who together held a 82.9% stake
as of 31 December 2020. Moody's has also considered (1) the presence
of three independent non-executive directors on a board of seven
directors, and two independent non-executive directors who
chair the audit and remuneration committees, respectively,
and (2) the company's moderate 30%-40% dividend payout
ratio over the past two years; (3) the application of the listing
rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance
in Hong Kong.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the CFR if Zhongliang (1) diversifies its funding
channels and reduces the proportion of its trust financing; (2) continues
to executes its business plans and expands; (3) maintains adequate
liquidity; (4) sustains its credit metrics, including adjusted
EBIT/interest rising above 3.0x and revenue/adjusted debt in excess
of 80% on a continued basis.
A rating downgrade is unlikely, given the positive outlook.
However, Moody's could revise Zhongliang's outlook to stable if
the company's sales weaken or if it expands more aggressively, weakening
its credit metrics. Credit metrics that could trigger a ratings
downgrade include: (1) adjusted EBIT/interest trending toward 2.0x-2.5x;
(2) revenue/adjusted debt trending toward 60%.
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.
Zhongliang Holdings Group Company Limited is a Shanghai-based residential
property developer. The company engages in real estate development
in China. The Yangtze River Delta region contributed around 65%
of the company's contracted sales in 2020.
As of 31 December 2020, Zhongliang was 82.9% owned
by its chairman, Mr. Yang Jian, and his spouse,
who was acting in concert.
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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Cedric Lai
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
