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Rating Action:

Moody's downgrades KWG's rating to B2; outlook negative

03 Mar 2022

Hong Kong, March 03, 2022 -- Moody's Investors Service has downgraded KWG Group Holdings Limited's corporate family rating (CFR) to B2 from B1.

At the same time, Moody's has changed KWG's rating outlook to negative from stable.

"The rating downgrade reflects KWG's weakening contracted sales and heightened refinancing risks due to its sizable debt maturities amid a tight funding environment," says Celine Yang, a Moody's Vice President and Senior Analyst.

"The negative outlook reflects our expectation that the company's operations and liquidity will weaken over the next 12-18 months," adds Yang.

RATINGS RATIONALE

Moody's revised its assessment on KWG's liquidity to weak from adequate, in view of its sizable maturing debt in the next 6-12 months and the rating agency's expectation of a decline in the company's contracted sales amid difficult funding and operating environments, which will pressure KWG's operating cash flow and, in turn, its liquidity.

Specifically, KWG will have around USD900 million of offshore bonds maturing before the end of 2022. But the company is unlikely to issue new bonds at reasonable costs to refinance these bonds, given its weakened funding access.

KWG had unrestricted cash of RMB42.6 billion as of the end of June 2021. However, Moody's believes the company will not be able to fully mobilize all the cash for debt repayment at the holding company level as it has to keep a considerable amount of cash at the project level.

KWG has a large exposure to joint venture (JV) projects, which lowers its corporate transparency and increases uncertainty over its ability to control its project cash flow. The company also has a large amount of contingent liabilities related to its JVs, totaling RMB27 billion as of the end of June 2021.

Moody's expects KWG will endeavor to repay the maturing debt with internal cash, but the company will likely have to raise funds through asset sales or pledging its investment property portfolio as alternative sources to replenish its liquidity.

Moody's forecasts that KWG's contracted sales will fall 10%-15% over the next 1-2 years, driven by weak homebuyer confidence amid tight funding conditions. The decline in contracted sales will also strain the company's financial profile and liquidity. Although KWG's contracted sales remained flat at around RMB103 billion in 2021 compared with that in 2020, its sales dropped significantly by 29% in the second half (H2) of 2021 as the market deteriorated, compared with that during the same period a year ago.

Moody's projects KWG's revenue/adjusted debt and EBIT/interest coverage will remain weak at 25%-30% and around 2.3x, respectively, in the coming 12-18 months, from 27% and 2.3x for the 12 months ended June 2021.

KWG's B2 CFR reflects the company's strong brand name in its main operating regions and good operating track record, as well as its quality land bank, which focuses on tier 1 and tier 2 cities. Meanwhile, its rating is constrained by the company's high leverage, and sizable exposure to its JVs.

In terms of environmental, social and governance (ESG) factors, Moody's has considered the concentration of KWG's ownership by its controlling shareholders, Kong Jianmin and his family, who held a total stake of 63% in the company as of 30 June 2021. Moody's has also considered (1) the company's adherence to the internal governance structures and disclosure standards under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange; (2) the presence of audit, remuneration and nomination committees, with the first two chaired by independent nonexecutive directors (INEDs) and the audit committee comprising solely of INEDs.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

An upgrade is unlikely, given the negative outlook.

However, Moody's could return KWG's rating outlook to stable if the company improves its liquidity, access to funding and operating cash flow.

Credit metrics that could indicate a stable rating outlook include EBIT/interest coverage above 2.0x and unrestricted cash/short-term debt above 1.5x, both on a sustained basis.

On the other hand, Moody's could downgrade the rating if the company's liquidity and financial profiles deteriorate due to (1) a significant decline in contracted sales and cash collections; or (2) a material increase in the company's debt or contingent liabilities.

Credit metrics indicative of a downgrade include unrestricted cash to short-term debt falling below 1.0x and EBIT/interest coverage below 1.5x, both on a sustained basis.

The principal methodology used in this rating 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.

KWG Group Holdings Limited (KWG) is a Chinese property developer that was founded in 1995. As of 30 June 2021, the company had a total attributable land bank of 25.6 million square meters in gross floor area (GFA) across 41 cities in China, which can support three to five years of development. KWG mainly develops medium- to high-end residential properties, office buildings, shopping malls and hotels.

KWG listed on the Hong Kong Stock Exchange in July 2007. Its chairman, Kong Jianmin, and his family owned about 63% of the company as of 30 June 2021.

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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.

YuYing (Celine) Yang
Vice President - Senior 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

No Related Data.
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