Hong Kong, April 20, 2022 -- Moody's Investors Service has downgraded Dexin China Holdings Company Limited's corporate family rating (CFR) to B3 from B2 and senior unsecured rating to Caa1 from B3.
The rating outlook remains negative.
"The downgrade reflects our concerns over Dexin's weak corporate governance and its ability to publish its audited financial statement within the timeline as required by the Hong Kong Stock Exchange's listing rules, following its recent change in auditor and failure to report a disclosable transaction as required by the listing rules," says Alfred Hui, a Moody's Analyst.
"The negative outlook reflects Dexin's increased refinancing risks and worsening liquidity in view of its declining sales and a likely impairment of its access to funding," adds Hui.
RATINGS RATIONALE
On 19 April 2022, Dexin announced the resignation of PricewaterhouseCoopers (PwC) as its auditor and the appointment of Elite Partners CPA Limited as its new auditor, with effect from 14 April 2022 [1].
Dexin published its unaudited 2021 financial results on 31 March 2022, and had originally planned to release its audited 2021 financials by 30 April 2022. However, given its recent auditor change, it is uncertain whether the company can publish its audited results by its intended deadline. A further delay in its audited results announcement would exacerbate concerns over the company's corporate transparency and information disclosure.
In addition, Dexin announced on the same day that it had failed to report a disclosable transaction of pledge and guarantee agreements entered on 30 November 2021 with a supplier (an independent third party), which constitutes non-compliance of the listing rules [2]. Although the guarantee was released in January 2022, the failure of timely disclosure reflects the company's weak corporate governance and transparency, which affect its ability to comply with the necessary regulatory requirements.
These incidents will likely worsen Dexin's already weak funding access, and thereby elevate its refinancing risks for its upcoming debt maturities over the next 6-12 months.
Dexin's declining contracted sales will also weaken its liquidity. In the first quarter of 2022, its gross contracted sales dropped 51% to RMB9.35 billion.
The Caa1 senior unsecured debt rating is one notch lower than Dexin's CFR due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over Dexin's senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.
In terms of environmental, social and governance factors, Moody's has considered the risks associated with Dexin's concentrated ownership by its key shareholder and chairman, Mr. Hu Yiping, who held a stake of 70% in the company as of the end of June 2021. The delay in the release of its audited financial results, the auditor change and its failure to report a disclosable transaction as required by the Hong Kong Stock Exchange's listing rules reflect the company's weak corporate governance, transparency and information disclosure, which are part of Moody's governance considerations.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a rating upgrade is unlikely.
However, Moody's could return the rating outlook to stable if Dexin publishes its 2021 audited accounts in a timely manner without any adverse financial trends, its operations proved to be resilient, and its liquidity remained adequate amid the difficult operating and funding conditions.
On the other hand, Moody's could downgrade Dexin's ratings if there are signs of weakening in its liquidity, credit metrics or general governance practice.
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.
Dexin China Holdings Company Limited is a Zhejiang-based residential property developer. As of 31 December 2021, its land reserves totaled 19.1 million square meters in gross floor area, with most of them in the Yangtze River Delta cities such as Hangzhou, Wenzhou, Ningbo and Nanjing.
REGULATORY DISCLOSURES
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REFERENCES/CITATIONS
[1] Dexin's filings to Hong Kong Stock Exchange 19-Apr-2022
[2] Dexin's filings to Hong Kong Stock Exchange 19-Apr-2022
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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
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
