Hong Kong, September 16, 2021 -- Moody's Investors Service has downgraded to B2 from B1 the corporate family
rating (CFR) of Ronshine China Holdings Limited, and to B3 from
B2 the senior unsecured ratings. The outlook remains stable.
"The downgrade of Ronshine's ratings reflects our expectation that
the company's profitability and key credit metrics in the next 12-18
months will stay at weaker levels than that of its B1-rated Chinese
property peers, given its high land acquisition costs," says
Kelly Chen, a Moody's Assistant Vice President.
"At the same time, we expect the company's liquidity
buffer to decline, driven by difficult operating conditions in China's
property market, as well as the likely settlement of its unpaid
land premium and some debt repayments in the next 6-12 months,"
adds Chen.
However, Moody's expects the company to maintain adequate
liquidity over the next 12-18 months, which underpins the
stable outlook on the ratings.
RATINGS RATIONALE
Ronshine's B2 CFR continues to reflect its track record and strong market
position in property development in the Yangtze River Delta region and
Fujian Province. The B2 CFR also takes into account the company's
adequate liquidity and diversified access to funding.
On the other hand, the rating is constrained by Ronshine's
aggressive expansion, resulting in low profitability and weakened
interest coverage; and its high exposure to joint ventures,
which lowers corporate transparency.
Moody's expects Ronshine's interest servicing ability, as measured
by EBIT interest coverage, to stay weak at around 1.5x over
the next 12-18 months, compared with 1.3x for the
12 months ended June 2021. This is because the company's
gross margin is likely to stay low at 10% over the next 12-18
months, because of likely high land acquisition costs in major cities.
Moody's believes the company will have limited flexibility to adjust
selling prices given tight regulatory controls over property selling prices
in major cities. The average cost of the company's land acquisitions
in the first half (H1) of 2021 was at RMB11,132 per square meter
(/sqm), significantly higher than the average cost of its land bank
of RMB7,902/sqm as of the end of 2020.
Meanwhile, Ronshine's debt leverage, as measured by revenue/adjusted
debt, will be around 60%-65%, versus
65% for the 12 months ended June 2021.
Ronshine replenished its land bank in 1H 2021, investing RMB21.7
billion in land acquisitions, which represent 59% of the
company's estimated contracted sales in the same period.
As of the end of June 2021, Ronshine had an unsold land bank of
around 20 million sqm, which can only support Ronshine's development
for 2-2.5 years. Moody's expects the company
to balance its land appetite and balance sheet liquidity over the next
12-18 months, which will constrain the company's sales
growth.
Ronshine has a large amount of debt maturing or becoming puttable from
1 September 2021 to 31 December 2022 -- namely USD1.5 billion
of offshore bonds and RMB9.4 billion of onshore bonds maturing
or becoming puttable during the period.
However, Ronshine's liquidity will remain adequate.
Moody's expects the company's cash holding and operating cash
flow over the next 12-18 months to be sufficient to cover its maturing
debt, committed land premiums, and dividend payments over
the same period. Ronshine had unrestricted cash of RMB27.3
billion as of the end of June 2021, which covered 109% of
its short-term debt.
Ronshine's B3 senior unsecured rating is one notch lower than its CFR
to reflect the risk of structural subordination. This subordination
risk reflects the fact that the majority of Ronshine's claims are at its
operating subsidiaries and have priority over claims at the holding company
in a bankruptcy scenario. In addition, the holding company
lacks significant mitigating factors for structural subordination.
As a result, the expected recovery rate for claims at the holding
company will be lower.
With respect to environmental, social and governance (ESG) factors,
Ronshine's B2 CFR rating considers the company's ownership by its chairman,
Mr. Ou Zonghong, who owned 65% of Ronshine as of the
end of June 2021. It also considers the company's established governance
structures and standards as required by the relevant code for companies
listed on the Hong Kong Stock Exchange. Furthermore, Ronshine
has three special committees — an audit committee, a remuneration
committee and a nomination committee -- one of which is
chaired and dominated by independent non-executive directors.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ronshine's ratings can be upgraded if the company exercises discipline
in its operational and financial management; significantly improves
its profitability; strengthens its financial metrics, such
that its revenue/adjusted debt exceeds 60%-65%,
and EBIT/interest is above 2.0x-2.5x on a sustained
basis; and maintains adequate liquidity, with unrestricted
cash/short-term debt consistently above 1.25x.
A material reduction in contingent liabilities associated with JVs or
lower risk of providing funding support to JVs could also be positive
for the ratings. This could be a result of reduced usage of JVs
or a material improvement in the financial strengths of its JV projects.
The rating could be downgraded if Ronshine's contracted sales and
cash collection weaken; the company fails to increase its profit
margin; continues to pursue aggressive land acquisition that undermines
its liquidity, such that unrestricted cash/short-term debt
falls below 1.0x, or significantly increases its debt leverage.
Credit metrics indicative of a rating downgrade include EBIT/interest
coverage failing to recover to 1.5x or adjusted revenue/debt falling
below 50% on a sustained basis.
Downward pressure could also increase if the company's contingent
liabilities associated with JVs or the need to provide funding support
to JVs increases significantly.
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.
Ronshine China Holdings Limited was incorporated in the Cayman Islands
in 2014 and listed on the Hong Kong Stock Exchange in January 2016.
As a property developer, it focuses on mid-to high-end
residential units in Fujian Province, the Yangtze River Delta,
the Pearl River Delta, Central China and the Bohai Sea Region.
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Chen Chen
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
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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.
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