Hong Kong, January 13, 2021 -- Moody's Investors Service has downgraded to B2 from Ba3 China Fortune
Land Development Co., Ltd.'s (CFLD) corporate family
rating (CFR) and CFLD (Cayman) Investment Ltd.'s backed senior
unsecured rating.
At the same time, Moody's has placed the ratings under review for
further downgrade. The previous outlook was negative.
"The downgrade reflects CFLD's weaker-than-expected operating
performance and cash flow generation, which has heightened refinancing
risk given its weak liquidity position and sizable debt maturing or becoming
puttable over the coming 12-18 months," says Danny Chan,
a Moody's Analyst.
"Meanwhile, the review for further downgrade reflects the
uncertainties related to its refinancing plans," adds Chan.
RATINGS RATIONALE
Moody's expects CFLD's revenue/adjusted debt and EBIT/interest to decline
to 35%-40% and 1.5x-2.0x respectively,
over the next 12-18 months from the 50% and 2.8x
it recorded for the 12 months ended 30 June 2020, driven mainly
by weak revenue growth and sustained high debt.
This weak revenue growth is in turn driven by CFLD's weakened property
sales in the past 12-18 months. CFLD's total contracted
sales declined 40% year-over-year in the first nine
months of 2020 to RMB60 billion, following a 12% decline
in 2019. The sales decline was mainly driven by the weak residential
property development business, with a 60% year-over-year
drop in sales to RMB30 billion in that segment more than offsetting 37%
year-over-year sales growth in its industrial segment during
the first nine months of 2020.
Moody's expects the company's weak liquidity position will
persist over the next 12-18 months as its sales performance will
likely remain weak, in turn driven by home purchase restrictions
that are still prevalent in many of CFLD's core markets and the
generally tight policies on credit growth in the China's property
sector.
Moody's estimates that CFLD has about RMB90 billion of debt maturing
in 2021 - including onshore bonds of RMB24 billion and offshore
senior unsecured notes of USD1.6 billion (or RMB11 billion) --
far exceeding its cash balance of RMB38 billion as of September 2020.
CFLD's cash holdings and expected operating cash flow will be insufficient
to cover its maturing debt and unpaid land premiums over the next 12-18
months. As such, the company will need to rely on additional
debt or other forms of capital to address its refinancing needs.
While CFLD has a track record of refinancing maturing onshore and offshore
debt, its weak operating performance and the tightened funding environment
have weakened its access to funding.
CFLD's refinancing risk could be mitigated by support from its second-largest
shareholder, Ping An Life Insurance Company of China, Ltd.
(A2 stable), which owns a 25% equity stake in CFLD.
Ping An and its affiliates have provided debt funding to CFLD over past
6-12 months, including Ping An Life's subscription
to CLFG's RMB12 billion perpetual bonds. However, CFLD's
refinancing risks could escalate if there are any signs of weakening support
from Ping An.
CFLD's B2 corporate family rating (CFR) reflects its standalone credit
strength and a one-notch uplift based on Moody's expectation that
Ping An Life will provide support to CFLD in times of need.
With regards to governance risk, Moody's has considered CFLD's
aggressive financial policy and the concentration of ownership in its
controlling shareholder, Mr. Wen-Xue Wang, who
collectively with persons acting in concert held a 37.20%
stake in the company at the end of June 2020, with 32.13%
of this stake pledged as of the same date.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's review will focus on (1) CFLD's plans to refinance its maturing
debt in 2021, including the USD530 million bond due Feb 2021;
(2) its liquidity position and fundraising capability to repay or refinance
the maturing debt; and (3) its relationship with Ping An, and
in particular any signs of direct or indirect support from Ping An.
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 Fortune Land Development Co., Ltd. was established
in 1998 and listed on the Shanghai Stock Exchange in 2011. The
company engages in residential property development and the investment
and operation of integrated industrial parks. The company's industrial
park businesses include primary land development, infrastructure
development and construction, industry development services,
and property management and public services.
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Danny Chan
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.)
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Franco Leung
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077