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Rating Action:

Moody's changes outlooks for Evergrande, Hengda Real Estate, Tianji Holding to stable from positive

16 Sep 2019

Hong Kong, September 16, 2019 -- Moody's Investors Service has revised the outlooks for the ratings of China Evergrande Group (Evergrande), Hengda Real Estate Group Company Limited, Tianji Holding Limited and Scenery Journey Limited to stable from positive.

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 for the notes issued by Scenery Journey and guaranteed by Tianji. The notes are also supported by a deed of equity interest purchase undertaking and a keepwell deed 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 revision of the outlooks to stable from positive reflects our expectation that the credit profiles of Evergrande and Hengda are likely to prove more in line with other B1-rated Chinese property peers over the next 12-18 months, due to slower-than-expected growth in revenue and contracted sales, and the slower pace of deleveraging," says Josephine Ho, a Moody's Vice President and Senior Analyst.

"The stable outlooks also reflect our expectation that Evergrande and Hengda will maintain their access to funding to refinance their maturing debt over the next 12-18 months," adds Ho.

Moody's expects that Evergrande's debt leverage — as measured by revenue/adjusted debt — will improve to 50%-60% over the next 12-18 months, down from Moody's previous expectation of 60%-75%, after dropping to 39% for the 12 months ended 30 June 2019 from 53% in 2018.

Similarly, Moody's expects Hengda's improvement in revenue/adjusted debt will slow to 65%-70% over the next 12-18 months from Moody's previous projection of 71%-79% compared with 64% in 2018. The improving debt leverage of the two companies is driven by a combination of reduced spending on land and controlled debt growth.

The revised projected ratios will position the companies' CFRs appropriately at the B1 level.

For Evergrande, Moody's expects that the company will increase its investment in non-property businesses to RMB25-RMB40 billion over the next 12-18 months compared to around RMB18.5 billion in 2018. However, this size of investments remains manageable when compared with the company's main operations.

Moody's has included the RMB130 billion in investments from Hengda's strategic investors in the calculation of the company's adjusted debt, but notes that the funds were treated as equity by the company, in accordance with China GAAP and Hong Kong GAAP.

EBIT/interest for both Evergrande and Hengda will also strengthen because of their improving debt leverage. Moody's expects that Evergrande's EBIT/interest will improve to 2.5x-2.9x over the next 12-18 months from around 2.1x for the 12 months ended 30 June 2019 and 2.4x in 2018. At the same time, Hengda's EBIT/interest will improve to 2.6x--2.9x over the next 12-18 months from 2.6x at the end of 2018.

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 still 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. As of 30 June 2019, Hengda accounted for 89% of Evergrande's revenue, 76% of cash, 71% of reported debt, 84% of total assets, and 78% of the company's land bank. Evergrande's B1 CFR further considers its high risk appetite in expanding its non-property businesses; a factor which will constrain its liquidity.

Liquidity for both Evergrande and Hengda is weak, given the sizable amount of upcoming short-term maturities from bank loans and trust loans, as well as the RMB70 billion potential repurchase of investments from strategic investors. However, the refinancing risk is mitigated by the companies' track record in accessing diversified funding channels, including the bank and capital markets for debt refinancing.

Evergrande's B2 senior unsecured rating is one notch below its CFR, reflecting legal and structural subordination.

Upward ratings pressure could emerge, if Evergrande: (1) demonstrates improved discipline on business growth and acquisitions; (2) shows a sufficient liquidity position to meet its refinancing needs and cover land acquisition costs; and (3) improves its credit metrics.

Financial indicators of ratings upgrade pressure for Evergrande could include (1) cash/short term debt exceeding 1.0x-1.25x; (2) revenue/adjusted debt exceeding 70%-75%; and (3) EBIT/interest exceeding 2.5x-3.0x, all on a sustainable basis.

On the other hand, downward ratings pressure could emerge, if Evergrande shows (1) aggressive acquisitions and a high-growth strategy; (2) a lack of progress in debt deleveraging; (3) weakening liquidity; or (4) a material reduction in the ownership of its subsidies, including Hengda.

Financial indicators of ratings downgrade pressure could include (1) cash/short term debt below 1.0x; (2) revenue/adjusted debt below 50%; and (3) EBIT/ interest below 2.0x.

Moody's could upgrade Hengda's CFR if the company (1) demonstrates tighter discipline in its debt growth, while growing its business; (2) shows a sufficient liquidity position to meet its refinancing needs and cover land acquisition costs; and (3) improves its credit metrics.

Financial indicators of rating upgrade pressure include Hengda's (1) cash/short-term debt exceeding 1.0x-1.25x; (2) revenue/adjusted debt exceeding 70%-75%; and (3) EBIT/interest exceeding 2.5x-3.0x on a sustained basis.

On the other hand, downward rating pressure could emerge, if Hengda shows (1) aggressive acquisitions and a high growth strategy; (2) a lack of progress in debt deleveraging; or (3) weakening liquidity.

Moody's has also revised the outlook for Tianji's CFR to stable from positive, because of the revision of the outlook on Hengda's CFR, which is in turn because of Hengda's weakened ability to provide support to Tianji.

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 the support from Hengda would mitigate the risk of structural subordination.

Moody's could upgrade Tianji's CFR if (1) Hengda's rating is upgraded; and (2) Tianji maintains a stable standalone profile, with its EBIT/interest ratio staying above 1.25x-1.50x.

On the other hand, 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.

In terms of environmental, social and governance 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 30 June 2019. Moody's points out that Evergrande demonstrates established internal governance structures and standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. The board has three independent non-executive directors out of a total nine board of directors.

Moody's has also considered the risk related to new energy vehicle (NEV) investments. Given that Evergrande's NEV business is at a nascent stage, it is unlikely to be profitable over the next 12-18 months and will incur additional capital expenditure.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. 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 30 June 2019, its land bank totaled 319 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 30 June 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Josephine Ho
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

No Related Data.
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