Hong Kong, January 23, 2020 -- Moody's Investors Service has confirmed Yanlord Land Group Limited's
(Yanlord) Ba2 corporate family rating (CFR).
In addition, Moody's has confirmed the Ba3 backed senior unsecured
rating on the bonds issued by Yanlord Land (HK) Co., Limited,
a wholly-owned subsidiary of Yanlord, and guaranteed by Yanlord.
At the same time, Moody's has changed the outlook to negative from
"rating under review".
These rating actions conclude Moody's review initiated on 28 October 2019.
RATINGS RATIONALE
"The ratings confirmation reflects our expectation that the newly acquired
assets from United Engineers Limited (UEL) will improve Yanlord's
business diversification and underpin a recovery in its credit metrics
over the next 12-18 months, from the weak levels estimated
for 2019," says Cedric Lai, a Moody's Vice President and Senior
Analyst.
"However, the negative outlook reflects the uncertainty around the
company's ability to execute on its ambitious deleveraging plan
in the next 12-18 months," adds Lai.
On 20 January 2019, Yanlord announced the closing of its general
offer for all UEL shares. Upon closing, the company held
95.91% of UEL's ordinary shares, triggering
the full acquisition of the company and making it a wholly-owned
subsidiary of Yanlord. Yanlord plans to delist UEL from the Singapore
Stock Exchange.
UEL specializes in property rental and hospitality, property development,
engineering, distribution, manufacturing, and corporate
services & others. It operates across Singapore, Malaysia,
China, and USA.
Moody's expects Yanlord's metrics will weaken following the
acquisition, as the company will fund the acquisition for 50%
with debt and as it will assume all of UEL's liabilities.
In addition, Moody's expects Yanlord will record slow revenue
recognition for 2019. Consequently, Moody's expects
Yanlord's debt leverage — as measured by revenue/adjusted debt --
will weaken to 38% in 2019 from 54% in 2018, and its
interest coverage — as measured by adjusted EBIT/interest coverage
— to fall to 3.8x from 5.3x over the same period.
However, Moody's expects Yanlord's credit metrics will improve
over the next 12-18 months, supported by (1) the company's
plan to deleverage by slowing its land acquisitions; (2) improving
revenue recognition on the back of strong contracted sales in 2019;
and (3) strong rental income growth from its newly acquired investment
properties portfolio in Singapore.
Specifically, Moody's forecasts that Yanlord's debt leverage and
interest coverage will improve to 55%-60% and 4.5x-5.0x
respectively over the next 12-18 months. In addition,
the company's adjusted rental income/interest coverage should improve
to 45%-50% over the same period. However,
these metrics will largely hinge on Yanlord's ability to deleverage
over the next 12-18 months.
For the full year of 2019, Yanlord registered strong 103%
year-on-year contracted sales growth to RMB55.5 billion.
Such strong contracted sales performance supports the company's liquidity.
Yanlord's Ba2 corporate family rating continues to reflect its established
brand name and high-quality products, which provide it with
strong pricing power and support its above-peer-average
gross margin. In addition, the company's sales strategy,
aimed at catering to a broader spectrum of market demand, helps
reduce the negative impact from regulatory measures that constrain property
demand.
The rating also considers Yanlord's good liquidity profile, and
strong access to both onshore and offshore funding.
Meanwhile, the rating is constrained by the company's (1) geographic
concentration; (2) high leverage due to its large-scale land
acquisitions and UEL acquisition; and (3) exposure to tightening
property regulations.
The company's Ba3 senior unsecured debt rating is one notch lower than
the corporate family rating, due to structural subordination risk.
This risk reflects the fact that the majority of claims are at the operating
subsidiaries and have priority over Yanlord'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.
Yanlord's liquidity position is good. Moody's expects that the
company's cash holdings and cash flow from operating activities will be
sufficient to cover its maturing debt and committed land payments over
the next 12 months. At 30 September 2019, Yanlord's
cash balance of RMB16.1 billion (including restricted cash of RMB436
million) covered about 141% of its short-term debt of RMB11.4
billion as of the same date.
In terms of environmental, social and governance (ESG) factors,
Moody's has taken into account the concentrated ownership by Yanlord's
key shareholder, Mr. Zhong Sheng Jian, who held an
approximate 70.11% direct and indirect stake as of 30 June
2019.
This risk is partially mitigated by (1) the presence of four independent
non-executive directors on Yanlord's eight-member board
of directors, who also chair the audit, nominating,
remuneration and risk management committees; (2) the company's moderate
15%-20% dividend payout ratio over the past three
years; and (3) the presence of other internal governance structures
and standards, as required under the Corporate Governance Code for
companies listed on the Singapore Stock Exchange.
Moody's is unlikely to upgrade Yanlord's ratings given the negative outlook.
Nevertheless, Moody's could revise the outlook to stable if the
company is successful in deleveraging through proactive financial management,
exercising prudence in any new land acquisitions or other mergers and
acquisitions, while sustaining sales growth through the cycles and
maintaining good liquidity.
The ratings could be downgraded if (1) the company's contracted sales
growth is slower than Moody's expectation; (2) its credit metrics
weaken, with EBIT/interest coverage falling below 3.5x,
adjusted revenue/debt falling below 60% or recurring rental income/interest
coverage failing to progress toward 40%-45%;
or (3) the company's liquidity deteriorates, with cash/short-term
debt below 1.25x, and all on a sustained basis.
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.
Yanlord Land Group Limited is a major property developer in China.
The company operates across a number of major Chinese cities, including
Shanghai, Nanjing, Suzhou, Hangzhou, Nantong,
Shenzhen, Tianjin, Zhuhai, Chengdu, Tangshan,
Jinan, Zhongshan, Haikou, Sanya and Wuhan.
Yanlord Land Group Limited listed on the Singapore Stock Exchange in 2006.
The company had a total land bank of 8.59 million square meters
by gross floor area at 30 June 2019.
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
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The first name below is the lead rating analyst for this Credit Rating
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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
