Hong Kong, June 23, 2020 -- Moody's Investors Service has changed the outlooks on the ratings
of China Evergrande Group (Evergrande), Hengda Real Estate Group
Company Limited (Hengda), Tianji Holding Limited (Tianji) and Scenery
Journey Limited (Scenery Journey) to negative from stable.
At the same time, Moody's has affirmed the following ratings:
• Evergrande's B1 corporate family rating (CFR) and B2 senior unsecured
debt rating;
• Hengda's B1 CFR;
• Tianji's B2 CFR; and
• The B2 backed senior unsecured rating on the notes issued by Scenery
Journey and guaranteed by Tianji. The notes are also supported
by a keepwell deed and a deed of equity interest purchase undertaking
between Hengda, Tianji, Scenery Journey, and the bond
trustee.
Hengda is a 63.5%-owned onshore subsidiary of Evergrande.
It also owns 100% of Tianji, which in turn owns 100%
of Scenery Journey.
RATINGS RATIONALE
"The negative outlook reflects our concerns over Evergrande's ability
to materially reduce its high level of short-term debt, high
debt leverage and still high proportion of trust loans in its total debt
over the next 12-18 months," says Cedric Lai, a Moody's
Vice President and Senior Analyst. "In addition, the
negative outlook also reflects our concern over its ability to improve
its weakened profit margins amid deteriorating economic conditions and
our negative outlook for the China property sector."
Evergrande's liquidity is weak. The company had sizable short-term
debt of RMB372 billion at the end of 2019, mainly comprising trust
and bank loans. Its cash holdings of RMB229 billion at the end
of 2019 and its cash/short-term debt stood at 0.6x at the
end of 2019. Moody's expects its current cash holdings,
together with its cash flow from operations, will not be sufficient
to cover its debt maturities and other obligations through the next 12-18
months, meaning the company will need to raise new debt to manage
its refinancing needs.
The negative outlook also considers the costs and risks associated with
its non-property businesses, including new energy vehicle
(NEV) investments. Such businesses have consumed sizable capital
and are unlikely to turn sufficiently profitable to replenish its capital
over the next 12-18 months, given their nascent stage.
This has contributed in part to a degree of divergence in the financial
profiles of Evergrande and Hengda, given Hengda's exclusive
focus on property development in China.
Meanwhile, the company recorded solid 18% year-on-year
contracted sales growth to RMB272.8 billion in the first five months
of 2020, outperforming nationwide property sales growth over the
same period. Moody's expects the company's contracted sales will
grow modestly in 2020 from the RMB601 billion recorded in 2019,
supported by its strong sales execution. Nevertheless, such
development will unlikely result in a meaningful reduction in short-term
debt. Refinancing risk however is mitigated by Evergrande's
track record of accessing diversified funding channels, including
the bank and capital markets for debt refinancing.
Moody's expects that Evergrande will reduce spending on land and
control debt growth over the next 12-18 months given its high debt
leverage. Accordingly, Moody's expects that Evergrande's
debt leverage — as measured by revenue/adjusted debt — will
improve to 53%-59% over the next 12-18 months
from 47% in 2019. Similarly, Moody's expects Hengda's
revenue/adjusted debt will increase to 67%-77% over
the next 12-18 months from 59% in 2019.
Moody's has included the RMB130 billion in investments from Hengda's strategic
investors in the calculation of the companies' adjusted debt,
but notes that the funds were treated as equity by the companies,
in accordance with China GAAP and Hong Kong GAAP.
Adjusted EBIT/interest for both Evergrande and Hengda will also improve
because of the leverage trend. Specifically, Moody's expects
that Evergrande's EBIT/interest will improve to 2.1x-2.3x
over the next 12-18 months from 1.7x in 2019, and
Hengda's EBIT/interest to 2.5x-2.8x from 2.1x
over the same period.
Hengda's B1 CFR reflects the company's strong market position as one of
the top property developers in China (A1 stable) in terms of contracted
sales and the size of its land bank. The rating also reflects Hengda's
nationwide geographic coverage, strong sales execution, low-cost
land bank and focus on mass-market residential properties.
However, the company's CFR is constrained by its weak liquidity
and high debt leverage.
Evergrande's B1 CFR mainly reflects the credit profile of Hengda,
with the latter accounting for most of Evergrande operations and financial
profile. At the end of 2019, Hengda accounted for 89%
of Evergrande's revenue, 78% of cash, 70% of
reported debt, 84% of total assets, and around 80%
of the company's land bank. Evergrande's B1 CFR further considers
its high risk appetite in expanding its non-property businesses,
a factor that constrains its liquidity.
Evergrande's B2 senior unsecured rating is one notch below its CFR,
reflecting legal and structural subordination. This risk reflects
the fact that most of the 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.
Tianji's B2 CFR reflects the company's standalone credit profile and a
one-notch rating uplift, based on Moody's expectation that
Hengda will provide financial support to Tianji in a situation of financial
stress.
The one-notch uplift reflects (1) Hengda's full ownership of Tianji;
(2) Tianji's status as the primary platform for Hengda to invest in offshore
property projects and raise offshore funds; and (3) Hengda's track
record of providing financial support to Tianji.
Tianji's standalone credit profile factors in its moderately large scale,
weak liquidity, and weak credit metrics.
The B2 senior unsecured rating of the notes guaranteed by Tianji takes
into account Moody's expectation that support from Hengda mitigates the
risk of structural subordination.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentrated ownership by Evergrande's key
shareholders, Mr. Hui Ka-yin and his wife, who
held a total 77% stake in the company at end of 2019. Evergrande
benefits from established internal governance structures and standards,
as required for companies listed on the Hong Kong Stock Exchange.
The board has three independent non-executive directors out of
a total nine-member board of directors.
Moody's regards the impact of the deteriorating global economic outlook
amid the rapid and widening spread of the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade Evergrande's CFR if (1) it embarks
on aggressive acquisitions and a high-growth strategy; (2)
fails to deleverage; (3) its liquidity weakens; or (4) there
is a material reduction in the ownership of its subsidies, including
Hengda.
Metrics indicative of a downgrade include (1) cash/short term debt below
1.0x; (2) revenue/adjusted debt below 50%; and
(3) EBIT/ interest below 2.0x.
An upgrade of Evergrande's CFR is unlikely in the near term given the
negative rating outlook. However, the outlook could return
to stable if (1) the company demonstrates discipline in its business growth
and acquisitions; (2) its liquidity position improves so that it
can meet its refinancing needs; and (3) its credit metrics improve.
Moody's could downgrade Hengda's CFR if (1) it embarks on
aggressive acquisitions and a high-growth strategy; (2) fails
to deleverage; or (3) its liquidity weakens.
An upgrade of Hengda's CFR is unlikely in the near term given the negative
rating outlook. However, the outlook could return to stable
if (1) the company demonstrates discipline in its debt growth as it grows
its business; (2) its liquidity position improves so that it can
meet its refinancing needs; and (3) its credit metrics improve.
Moody's could downgrade Tianji's CFR if (1) its liquidity position further
weakens; (2) Hengda's rating is downgraded; or (3) Tianji's
significance within the Hengda group declines, leading to reduced
financial or operational support.
An upgrade of Tianji's CFR is unlikely in the near term given the negative
rating outlook. However, the outlook could return to stable
if (1) the outlook on Hengda's rating returns to stable; and (2)
Tianji maintains a stable standalone profile.
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 Evergrande Group is among the top five developers in China by sales
volume, with a standardized operating model. Founded in 1996
in Guangzhou, the company has rapidly expanded its business across
China over the past few years. At 31 December 2019, its land
bank totaled 293 million square meters in gross floor area.
Hengda Real Estate Group Company Limited is the property arm and flagship
subsidiary of China Evergrande Group. It is among the top property
developers in China by sales volume, with a standardized operating
model. Founded in 1996 in Guangzhou, Hengda has rapidly expanded
its business across the country over the past few years.
China Evergrande Group is Hengda's largest shareholder. At 31 December
2019, the former owned 63.5% of Hengda's shares.
Incorporated in Hong Kong in 2009, Tianji Holding Limited is an
offshore holding company that houses some of Hengda's property projects
in China and overseas, including Hengda's Hong Kong headquarters.
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Cedric Lai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Franco Leung
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