Hong Kong, May 25, 2020 -- Moody's Investors Service has downgraded to B1 from Ba3 the corporate
family rating (CFR) of Guangzhou R&F Properties Co.,
Ltd. (Guangzhou R&F) and to B2 from B1 the CFR of R&F Properties
(HK) Company Limited (R&F HK).
All the outlooks are changed to negative from rating under review.
This concludes the review on the ratings of Guangzhou R&F and R&F
HK initiated on 3 April 2020.
RATINGS RATIONALE
"The downgrade of Guangzhou R&F's CFR reflects our concern over
its weak operating cash flow and the sizeable amount of debt maturing
over the next 12-18 months," says Kaven Tsang,
a Moody's Senior Vice President.
Despite the company's reported annual contracted sales of RMB138
billion in 2019, Moody's estimates that its operating cash
flow before land payments registered around RMB10 billion, representing
about 7% of contracted sales, a level that is far below that
of its rated Chinese property peers.
This weakness in Guangzhou R&F's operating cash flow is unlikely
to materially improve in the near term, given its weak 5%
growth in contracted sales in 2019 and the 23% year-on-year
decline in contracted sales in the first four months of 2020.
The company's cash collection rate also declined in 2019 while its
accounts receivable increased. If there is no improvement in these
areas, the company's financial strength will remain weak.
Guangzhou R&F had RMB62 billion in debt maturing over the next 12
months at the end of 2019. The company's cash holdings of RMB38
billion at the end of 2019 and estimated operating cash flows for the
next 12 months will not be sufficient to cover these debt repayments.
Therefore, the company will need to raise new debt to fund its upcoming
debt maturities.
The company's debt leverage is high with its low revenue/adjusted
debt ratio of 45% in 2019. Moody's expects the ratio
will be at 50%-55% over the next 12-18 months.
The company's high debt leverage reduces its ability to borrow more,
in turn constraining business growth. Guangzhou R&F's
high debt levels will also keep EBIT/interest modest at 2.2x-2.7x
in the next 12-18 months, compared with 2.2x in 2019.
Moreover, the weak economic situation in China and cautious investor
risk appetite increase uncertainty over Guangzhou R&F's ability
to raise new debt at reasonable cost to repay its maturing debt.
Guangzhou R&F's B1 CFR reflects the company's track record
of operating through the cycles in China's residential development
market and its geographically diversified land bank in China. It
also considers the rating constraints of weak liquidity and high debt
leverage.
The downgrade of R&F HK's CFR to B2 reflects the weakened ability
of its parent to provide financial and operational support in times of
need and the potential deterioration in its standalone credit quality
in view of the challenging operating environment for its hotel business.
R&F HK's CFR B2 rating incorporates a one-notch uplift
based on Moody's assessment of support from Guangzhou R&F in
times of need, because of (1) Guangzhou R&F's full ownership
of R&F HK and its intention to maintain its stake; (2) R&F
HK's role as the primary platform for the group to raise funds from offshore
banks and capital markets to invest in property projects in China,
as well as for overseas investments; (3) Guangzhou R&F's track
record of financial support to R&F HK, including the provision
of keepwell deeds and equity interest purchase undertakings of R&F
HK's guaranteed bonds in recent years; and (4) the reputational risks
for Guangzhou R&F if R&F HK were to default.
R&F HK's liquidity position is also weak. As of 31 December
2019, R&F HK had cash holdings, including restricted cash,
of RMB 7.99 billion, compared to short-term debt of
RMB12.3 billion. The company relies on support from Guangzhou
R&F to access funding.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentrated ownership by Guangzhou R&F's
key shareholders.
Nevertheless, Guangzhou R&F's nine-member board
of directors includes three independent non-executive directors
and two non-executive directors. Additionally, the
company is subject to other internal governance structures and standards
required under the Corporate Governance Code for companies listed on the
Hong Kong Stock Exchange.
The company is transparent in disclosing its business and financial activities.
Its financial management favours the use of debt leverage that maximizes
return to shareholders, and its dividend payouts are higher than
many of its rated peers.
The negative outlooks reflect Guangzhou R&F and R&F HK's
high refinancing needs over the next 12-18 months. The negative
outlook of Guangzhou R&F also reflects its weak operating cash flow
due to low cash collection rates and/or rising accounts receivable.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade Guangzhou R&F's CFR if (1) it
does not improve its liquidity position in the near term; (2) contracted
sales decline to a greater extent than that of its rated peers; or
(3) its credit metrics weaken, with revenue/debt falling below 50%
or EBIT/interest falling below 2x.
An upgrade of Guangzhou R&F's CFR is unlikely given the negative
rating outlook. However, the outlook could return to stable
if the company refinances its existing short-term debt, improves
its operating cash flow, and cash coverage over short term debt
-- i.e. cash/short-term debt -- to 1x.
Moody's could downgrade R&F HK rating if (1) Guangzhou R&F's
rating is downgraded, (2) there is a reduction in the ownership
by or weakening in support from Guangzhou R&F, or (3) it accelerates
its development business and/or takes on aggressive land acquisitions
that lead to a material deterioration in its debt leverage and liquidity.
The outlook on R&F HK's CFR could return to stable if its liquidity
improves and the outlook on Guangzhou R&F returns to stable.
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.
Established in 1994 and listed on the Hong Kong Stock Exchange in 2005,
Guangzhou R&F Properties Co., Ltd. is a large
developer in China's residential and commercial property sector.
At the end of 2019, the company's land bank totaled 57.9
million square meters (sqm) in attributable saleable area, spread
across 97 cities in China and 6 cities overseas, including Australia,
the UK, Malaysia, Korea, and Cambodia. Mr.
Li Sze Lim and Mr. Zhang Li are the company's co-founders
and owned 30.99% and 29.52% equity interests,
respectively, as of 31 December 2019.
R&F Properties (HK) Company Limited (R&F HK) and its subsidiaries
are principally engaged in the development and sale of properties,
property investments and hotel operations in China. The company
was established in Hong Kong on 25 August 2005. It serves as an
offshore funding vehicle and holding company for some of Guangzhou R&F's
property projects in China.
REGULATORY DISCLOSURES
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The first name below is the lead rating analyst for this Credit Rating
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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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
