Hong Kong, September 09, 2022 -- Moody's Investors Service has downgraded China SCE Group Holdings Limited's corporate family rating (CFR) to B2 from B1, and the company's senior unsecured rating to B3 from B2.
At the same time, Moody's has changed the rating outlook to negative from ratings under review.
This concludes the review for downgrade initiated on 3 August 2022.
"The rating downgrade reflects our expectation that China SCE's credit metrics and liquidity will worsen over the next 12-18 months, due to its weak contracted sales and sizable refinancing needs over the period," says Alfred Hui, a Moody's Analyst.
"The negative outlook reflects uncertainties over China SCE's ability to raise new funding to address operating and refinancing needs over the next 12-18 months given its constrained access to funding," adds Hui.
RATINGS RATIONALE
Moody's expects China SCE's contracted sales to fall around 35% year on year in 2022 to around RMB68 billion amid the challenging operating environment. During the first 8 months of 2022, China SCE's contracted sales declined 45% year on year to RMB41.1 billion. The weak contracted sales will weigh on the company's operating cash flow and liquidity.
As of end of June 2022, China SCE's unrestricted cash balance reduced to RMB14.5 billion from RMB15.7 billion as of the end of 2021, due to weakened operating cash flow from lower contracted sales.
China SCE also has a sizable amount of debt at the holding company level coming due or becoming puttable over the next 12-18 months, including RMB2.5 billion of onshore bonds, a USD500 million offshore bond and certain offshore bank loans.
Moody's expects the company to repay most of these debt by internal cash, given its weakened funding access.
While the company's liquidity remains adequate, these repayments will diminish the company's liquidity and reduce funding available to support its operations.
Furthermore, the company has a high exposure to offshore debt financing. Therefore, its constrained access to these types of funding for a prolonged period would further strain the company's liquidity and financial flexibility. As of end of June 2022, offshore debt accounted for 41% of its reported debt.
Moody's notes that China SCE could raise funding through disposing or pledging its investment properties. However, these transactions entail high execution uncertainties given the prevailing difficult market conditions.
Moody's expects China SCE's credit metrics will continue to deteriorate over the next 12-18 months, driven by lower revenue and gross margins.
China SCE's interest servicing ability, as measured by EBIT/interest expense, will weaken to 1.7x-1.9x over the next 12-18 months from 2.0x for the 12 months ended June 2022. Particularly, its gross margin will contract to 18%-20% over this period, as compared with 22.2% in the first half (H1) of 2022 and 21.7% in 2021, as the company will likely need to lower the contracted sales price to boost sales and cash collection. In the first 8 months of 2022, the average selling price of China SCE's contracted sales dropped 18% year on year to RMB12,610 per square meter.
China SCE's B3 senior unsecured rating is one notch lower than the CFR to reflect structural subordination risk. Most of the company's consolidated claims are at its operating subsidiaries, which have priority over its senior unsecured claims at the holding company in a bankruptcy scenario. Moody's expects the likely recovery rate for claims at the holding company will be lower.
In terms of environmental, social and governance (ESG) considerations, Moody's has considered China SCE's concentrated ownership by its controlling shareholder, Mr. Wong Chiu Yeung, who held a 50.2% stake as of 31 August 2022.
Moody's has also considered (1) the presence of three independent nonexecutive directors on the board, who also chair the audit and remuneration committees; (2) China SCE's moderate 17%-23% 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 Hong Kong Stock Exchange.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of China SCE's ratings is unlikely, given the negative outlook. However, Moody's could revise the outlook to stable if the company improves its contracted sales performance, liquidity and access to funding.
Moody's could downgrade China SCE's ratings if the company's contracted sales remain weak such that its operating cash flow and credit metrics are likely to deteriorate, or its liquidity and access to funding weaken further.
Credit metrics indicative of a rating downgrade includes unrestricted cash/ short-term debt below 1.0x, a gross margin below 15% and EBIT interest coverage falling below 1.5x on a sustained basis.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Founded in 1996, China SCE Group Holdings Limited listed on the Hong Kong Stock Exchange in February 2010. As of 30 June 2022, the company had a total land bank of around 36.65 million square meters in terms of gross floor area, with nationwide coverage across various geographical regions in China.
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 on https://ratings.moodys.com/rating-definitions.
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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.
Alfred Hui
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
Kaven Tsang
Senior Vice President
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
