Hong Kong, October 20, 2021 -- Moody's Investors Service has downgraded Central China Real Estate Limited's
(CCRE) corporate family rating (CFR) to B1 from Ba3 and the company's
senior unsecured rating to B2 from B1.
The outlook remains negative.
"The downgrade reflects CCRE's weakened funding access, and
reduced operational and financial flexibility amid challenging market
conditions," says Kaven Tsang, a Moody's Senior
Vice President.
"The negative outlook reflects our expectation that CCRE's contracted
sales will fall over the next 6-12 months and uncertainty over
the company's ability to secure new funding at reasonable costs to reduce
its reliance on offshore funding, given the tight funding environment
for the property sector," adds Tsang.
RATINGS RATIONALE
CCRE's B1 CFR reflects its leading market position and long operating
track record in Henan province. The rating also takes into consideration
its adequate liquidity.
However, CCRE's geographic concentration in Henan limits its operational
flexibility and exposes it to regional economic and regulatory risks.
The B1 CFR is also constrained by its weakened funding access to the offshore
bond market and its high reliance on funding from this market.
Moody's expects CCRE's contracted sales to decline over the next
6-12 months, driven by weaker homebuyer confidence amid tight
funding conditions, though it has sizable saleable resources of
around RMB68.8 billion in the second half (H2). These factors
will weaken the company's operating cash flow and add pressure to
the company's profit margin, which will weaken its credit
metrics and liquidity. In the first nine months, the company's
contracted sales declined 2.5% to RMB44 billion.
CCRE's access to the offshore bond market, which is its major
funding channel, has also weakened. Moody's expects
the company to use its internal cash to repay some of its maturing debt.
As such, the company's exposure to offshore funding will decline,
but the repayment will reduce the funding available for its operations
over the next 12-18 months. While CCRE's land bank
is sufficient to support its operations over the next 3-4 years,
the company's operational and financial flexibility will reduce if the
weakness in debt capital markets persists.
Nevertheless, CCRE's liquidity will remain adequate, reflecting
Moody's expectation that its cash holdings and operating cash flow
are sufficient to cover its short-term debt and committed land
premiums over the next 12-18 months.
Moody's expects CCRE's revenue to grow moderately, supported
by its unrecognized contracted sales of RMB67.6 billion (at the
consolidated level) as of 30 June 2021. However, its EBIT/interest
coverage will trend lower over the next 12-18 months from 3.2x
for the 12 months ended June 2021 because of Moody's expectation
of an increase in the company's interest costs and a potential decline
in profit margins over the period.
CCRE's senior unsecured bond rating is one notch lower than its CFR because
of the risk of structural subordination. This subordination risk
reflects the fact that most of CCRE'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.
In terms of environmental, social and governance (ESG) factors,
Moody's has taken into account the concentration of CCRE's ownership in
its controlling shareholder, Wu Po Sum, who had a 69.64%
stake in the company as of 30 June 2021. The company's provision
of financial guarantees to related parties will also increase its contingent
liabilities and the risk of potential fund leakage.
Moody's has also considered the presence of special committees —
in particular, the audit and remuneration committees — that
are chaired by independent nonexecutive directors to oversee corporate
governance; and the application of the Listing Rules of the Hong
Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong
SAR, China in governing related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade CCRE's ratings if the company's contracted
sales, profitability, credit metrics or liquidity weaken.
Deteriorating credit metrics that could trigger a rating downgrade include
EBIT/interest coverage below 2.25x-2.5x, a
gross profit margin below 17.5%-20.0%
or unrestricted cash/adjusted short-term debt below 1.0x-1.25x.
Any sign of an inability to refinance maturing debt, restore its
offshore funding access or balance its exposure to different types of
funding channels while maintaining reasonable funding costs could also
strain the company's ratings.
Downgrade pressure could also emerge if the company's contingent
liabilities associated with JVs or the risk of providing funding support
to JVs increases significantly. This could result from a significant
deterioration in the financial strength and liquidity of its JV projects
or a substantial increase in investments in new JV projects.
An upgrade of CCRE's ratings is unlikely over the next 12 months,
given the negative outlook.
However, Moody's could change the outlook to stable if CCRE
(1) secures new term funding, (2) restores its offshore funding
access at reasonable funding costs, (3) balances its funding channels
with lower reliance on offshore funding, and (4) maintains stable
sales, profitability and credit metrics, and adequate liquidity
through the next 12-18 months.
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.
Founded in 1992, Central China Real Estate Limited (CCRE) is a leading
property developer in China's Henan province. As of 30 June 2021,
the company's land bank totaled 56.21 million square meters in
attributable gross floor area (GFA). The company was listed on
the Hong Kong Stock Exchange in June 2008. CCRE's chairman,
Wu Po Sum, owned a 69.64% stake in the company as
of 30 June 2021.
REGULATORY DISCLOSURES
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Kaven Tsang
Senior Vice President
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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
