Hong Kong, June 23, 2020 -- Moody's Investors Service has confirmed Yuzhou Properties Company Limited's
Ba3 corporate family rating (CFR) and the B1 senior unsecured rating on
its bonds.
The outlook has been changed to stable from ratings under review.
This concludes the review on the ratings of Yuzhou initiated on 9 April
2020.
RATINGS RATIONALE
"The ratings confirmation reflects our expectation that Yuzhou's
credit metrics will improve meaningfully over the coming 12-18
months from weak levels in 2019, supported by the company's
deleveraging plans and track record of strong sales execution,"
says Celine Yang, a Moody's Assistant Vice President and Analyst.
Moody's has assessed Yuzhou's willingness and ability to deleverage
during its review and expects that Yuzhou will not incur a significant
increase in its total debt over the next 12-18 months, as
it will likely reduce its land acquisition budget and lower its sales
targets.
In particular, the company's well-located land bank
in the Yangtze river Delta area, West strait area, Bohai Rim
area and the Greater Bay area, as well as its abundant saleable
resources of RMB180 billion in 2020 will support its property sales in
the coming 12-18 months without undue need for land replenishment.
The company's strong sales execution is illustrated by its robust
44% sales growth in the first five months of 2020 despite coronavirus-related
disruptions.
Moody's expects Yuzhou's gross contracted sales to increase
by around 25%-30% to reach over RMB95 billion in
2020 from RMB 75.1 billion in 2019. The strong cash collection
from property sales will help Yuzhou fund its cash expenditure.
Moody's has also considered the fact that Yuzhou's sustained
good liquidity buffer will mitigate the risk of high debt leverage in
the near term.
Yuzhou's liquidity is good. The company's cash-on-hand
of RMB35.5 billion as of 31 December 2019 covers around 233%
of its short-term debt of RMB15.3 billion. Moody's
expects its cash holding and operating cash flow will be sufficient to
cover its maturing debt, committed land premiums and dividend payments
in the next 12-18 months.
Moody's also expects that Yuzhou's revenue, financial
metrics and visibility will improve as it increasingly consolidates joint
ventures or associated projects in the coming 12- 18 months.
Specifically, the company's leverage, as measured by revenue/adjusted
debt, will improve to 50%-60% over the next
12-18 months from the weak level of 33.8% recorded
in 2019. At the same time, its interest coverage, as
measured by adjusted EBIT/ interest, will gradually improve to 2.5x
from 2.0x during the same period.
Yuzhou's Ba3 corporate family rating (CFR) continues to reflect its (1)
track record of developing and selling residential properties in the Yangtze
River Delta, Bohai Rim and West Strait area, (2) growing operating
scale and improved geographic diversification, and (3) good liquidity.
However, its Ba3 rating is constrained by weak credit metrics and
high reliance on sales from JVs and associates.
The stable outlook reflects Moody's expectation that Yuzhou will
execute its business plan and maintain good liquidity while improving
its credit metrics over the next 12-18 months.
In terms of environmental, social and governance (ESG) factors,
Yuzhou's Ba3 CFR has considered the company's concentrated ownership in
its controlling shareholder, Mr. Lam Lung On, who held
a 57.38% stake in the company at 31 December 2019 and Yuzhou's
relatively high dividend payout ratio of 46.8% in 2019,
compared to 35%-36.5% in the previous four
years.
Yuzhou's CFR also takes into consideration the presence of internal governance
structures and disclosure standards, as required under the Corporate
Governance Code for companies listed on the Hong Kong Stock Exchange.
The company has three special committees; the Audit Committee,
the Remuneration Committee and the Nomination Committee, which are
all chaired by an independent non-executive director.
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.
Yuzhou's B1 senior unsecured bond rating is one notch below its
CFR because of the risk of structural subordination. This subordination
risk reflects the fact that most of Yuzhou's 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Yuzhou's ratings could be upgraded if it (1) maintains good liquidity,
(2) executes its contracted sales growth target while maintaining stable
margins, and (3) improves its credit metrics, with revenue/adjusted
debt trending to 70%-75% and EBIT/interest coverage
exceeding 3.0x-3.5x on a sustained basis.
A material reduction in contingent liabilities associated with joint ventures
or lower risk of providing funding support to joint ventures could also
be positive for the ratings. This could be a result of reduced
usage of joint ventures or a material improvement in the financial strengths
of its JV projects.
Downward rating pressure could emerge if Yuzhou records a weakening in
its contracted sales growth, liquidity, profit margins or
credit metrics. Credit metrics indicative of a downgrade include
(1) cash/short-term debt below 1.5x, (2) EBIT interest
coverage below 2.0-2.5x, and (3) revenue/adjusted
debt failing to trend back to 50%-60% on a sustained
basis.
Moody's could also downgrade the ratings if the company's contingent liabilities
associated with joint ventures or the risk of providing funding support
to joint ventures increases materially. This could be a result
of a material deterioration in the financial strengths and liquidity of
its joint venture projects or a substantial increase in investment in
new joint venture 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.
Yuzhou Properties Company Limited is a property developer that focuses
on residential housing in the Yangtze River Delta and the West Strait
Economic Zone. Established in Xiamen in the mid-1990s,
Yuzhou is one of the city's largest developers. The company moved
its headquarters to Shanghai in 2016.
Yuzhou listed its shares on the Hong Kong Stock Exchange in 2009.
At 31 December 2019, Yuzhou's land bank totaled 20.12 million
square meters in saleable gross floor area.
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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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
YuYing (Celine) Yang
Asst Vice President - 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