Hong Kong, April 29, 2022 -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Jiangsu Zhongnan Construction Grp Co., Ltd. (Jiangsu Zhongnan) to B3 from B2.
At the same time, Moody's has downgraded the senior unsecured rating on the bonds issued by Haimen Zhongnan Investment Development (International) Co., Ltd. and guaranteed by Jiangsu Zhongnan to Caa1 from B3.
The outlook remains negative for both entities.
"The downgrade reflects our expectation that Jiangsu Zhongnan's liquidity will weaken over the next 6-12 months, driven by its declining contracted sales, constrained funding access, and sizable refinancing amount," says Daniel Zhou, a Moody's Analyst.
The downgrade also reflects Moody's expectations that Jiangsu Zhongnan's credit metrics will stay weak over the next 12-18 months.
"The negative outlook reflects the uncertainties over the company's ability to raise new funding to address its refinancing needs and to maintain a sufficient liquidity buffer over the next 6-12 months," adds Zhou.
RATINGS RATIONALE
Moody's expects Jiangsu Zhongnan's liquidity to weaken over the next 6-12 months because of deteriorating sales and cash flow generation, as well as its weakened ability to raise new debt to address its sizable refinancing needs.
Moody's forecasts Jiangsu Zhongnan's contracted sales will fall around 30% over the next 6-12 months, due to difficult operating and funding conditions. Declining contracted sales will strain the company's cash flow, liquidity, and credit metrics.
The company's contracted sales plunged 66% year over year to RMB16.3 billion in the first quarter of 2022, following a 46% year-over-year reduction in the fourth quarter of 2021. This performance is one of the weakest among rated Chinese property companies, and reflects the impact of the recent resurgence of the COVID-19 pandemic in Yangtze River Delta.
Jiangsu Zhongnan's weakening liquidity is reflected in its reduction of unrestricted cash to RMB14.5 billion as of the end of 2021 from RMB24.4 billion as of the end of 2020, primarily because the company repaid maturing bonds and loans amid the difficult funding conditions. Accordingly, the company's unrestricted cash/short-term debt declined to 60% from 104% over the same period.
Moody's estimates that a significant portion of the company's unrestricted cash resides at the operating project levels, which could not be used to repay its debt at the holding company level. In addition, the company has a high exposure to joint ventures, which could limit its ability to control its cash flow.
The company will have high refinancing needs in the next 12-18 months. In particular, it will have RMB5.5 billion bonds maturing or becoming puttable before the end of September 2023, including USD223 million of offshore bonds maturing in June 2022 and USD240 million of offshore bonds becoming puttable in April 2023.
However, it is unlikely that Jiangsu Zhongnan can issue new bonds at a reasonable cost for refinancing, given the company's weakened access to the domestic and offshore bond market.
The company's continued usage of internal resources to repay debt will squeeze its liquidity buffer if it is unable to secure other funding channels over the next 6-12 months.
Moody's also expects Jiangsu Zhongnan's EBIT interest coverage to remain weak at 1.2x-1.3x over the next 12-18 months, after a sharp decline to 1.15x in 2021 from 2.4x in 2020. This is based on Moody's expectation of (1) decline in the company's reported revenue, and (2) thin gross profit margin from price discounts and rising operating expenses.
The projected metrics position the company's CFR at the weak end of the B rating category.
Jiangsu Zhongnan's B3 CFR continues to reflect its sizable operating scale and track record in the Yangtze River Delta region.
However, the B3 CFR is constrained by its weak credit metrics, uncertain access to funding with a high exposure to trust borrowings and its large exposure to joint ventures.
The Caa1 senior unsecured debt rating is one notch lower than Jiangsu Zhongnan's B3 CFR due to structural subordination risk. The subordination risk refers to the fact that the majority of Jiangsu Zhongnan's claims are at its operating subsidiaries and, in the event of a bankruptcy, have priority over claims at the holding company. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.
In terms of environmental, social and governance (ESG) considerations, Moody's has considered the company's concentrated ownership by Zhongnan Urban Construction Investment Co., Ltd., which had a 54.12% stake in the company as of 12 April 2022, and the risks posed by its shareholder's share pledge financing.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the rating is unlikely in the near term, given the negative rating outlook.
However, the rating outlook could return to stable if the company (1) improves its liquidity and demonstrates its ability to access funding by refinancing its onshore and offshore debt maturing over the next 6-12 months, as well as (2) enhances its profit margin and EBIT interest coverage, with the latter staying above 1.25x-1.5x consistently.
On the other hand, Moody's could downgrade Jiangsu Zhongnan's rating if the company's refinancing risks heighten, or its liquidity or access to funding deteriorates further.
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.
Jiangsu Zhongnan is based in China's Jiangsu Province and principally engages in property development and construction services. The company had a total land bank of around 41.4 million square meters as of December 2021.
Jiangsu Zhongnan was founded by Chen Jinshi, who has been in China's construction business since 1988 when he established the company. The company was listed on the Shenzhen Stock Exchange in 2009.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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.
Yiwei Daniel Zhou
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Franco Leung
Associate Managing Director
Corporate Finance Group
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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.
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