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Rating Action:

Moody's downgrades China South City to B2; outlook negative

 The document has been translated in other languages

30 Jun 2016

Hong Kong, June 30, 2016 -- Moody's Investors Service has downgraded China South City Holdings Limited's (CSC) corporate family rating to B2 from B1.

The rating outlook is negative.

RATINGS RATIONALE

"The downgrade reflects our expectation of continued weak contracted sales and credit metrics for CSC in the next 12 to 18 months, which will position the company in the mid-B rating range," says Stephanie Lau, a Moody's Assistant Vice President and Analyst.

In the fiscal year ending 31 March 2016 (FYE03/2016), CSC's contracted sales amounted to HKD6.6 billion, down 41% year-on-year.

Moody's expects that CSC's contracted sales will likely remain subdued over the next 12-18 months due to persistent slow growth in China's (Aa3 negative) economy.

Weakened business sentiment and a delay in the completion of infrastructure for its projects will continue to pressure the sales of CSC's trade center units.

The company's weak contracted sales, high inventory level, and need to fund new construction will result in rising gross debt.

As such, the company's credit metrics are not likely to improve in the next 12--18 months.

In FYE03/2016, CSC's inventory level rose to 4.8x of annual revenue from 2.7x in FYE03/2015, revenue/debt deteriorated to 18% from 39%, and EBIT/interest coverage dropped to 1.4x from 3.0x.

Moody's expects the company's revenue/debt and EBIT/interest coverage to remain weak at around 16% and 1.4x, respectively, in the next 12-18 months. Such levels position the company in the mid-B rating range.

CSC's B2 corporate family rating reflects its unique business model, which focuses on the development and operation of integrated logistics and trade centers in China.

The rating also reflects CSC's stream of non-development recurring income from rental, property management, logistics and warehouses services, as well as e-commerce.

Such income is derived from the services that the company provides at its logistics and trade centers, and is a stable source of debt-servicing funds.

According to Moody's estimates, the company's non-development recurring income covered about 0.7x of adjusted interest in FYE03/2016, and this level will likely be maintained in the next 12 to 18 months.

In addition, the B2 corporate family rating considers CSC's ability to access large suburban land plots at low cost. These low land costs have helped the company achieve high gross margins that offer some pricing flexibility during down cycles.

But the company has increased its development of residential properties, which will reduce its overall profit margin further; the margin fell to 48% in FYE03/2016 from 53% in FYE03/2015.

Moody's expects CSC's gross profit margin will decline below 48% in the next 12--18 months.

In addition, the company's liquidity risk is moderately high. Despite cash on hand of HKD11.7 billion at end-March 2016, it will have to raise new debt to refinance its short-term debt of around HKD10 billion and capital expenditure of around HKD7 billion.

The negative outlook reflects the company's weak sales performance, weak credit metrics and moderately high liquidity risk.

Given the negative outlook, there is limited upgrade pressure on the rating.

However, the rating outlook could return to stable if the company (1) improves its contracted sales performance; (2) reduces its inventory level; and (3) improves its liquidity position through reduced debt funding needs.

Downward rating pressure could arise if (1) CSC's liquidity position deteriorates further due to a sales drop that is below expectations or due to increased spending on land or construction; or (2) the company's credit metrics deteriorate further such that EBIT/interest is below 1.5x--1.0x or non-development recurring revenue/gross interest ratio stays below 0.5x.

Any signs of weakened access to domestic bank funds will also pressure the ratings.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in April 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

China South City Holdings Limited, listed on the Hong Kong Stock Exchange, is a developer and operator of large-scale integrated logistics and trade centers in China. The company operates one center in Shenzhen and is developing new trade centers in Nanning, Nanchang, Xian, Harbin, Zhengzhou, Hefei and Chongqing.

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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.

Stephanie Lau
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's downgrades China South City to B2; outlook negative
No Related Data.
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