Hong Kong, August 01, 2022 -- Moody's Investors Service has assigned a Ba1 corporate family rating (CFR) to Sino-Ocean Group Holding Limited (Sino-Ocean) and has withdrawn the company's Baa3 issuer rating.
At the same time, Moody's has downgraded (1) to Ba1 from Baa3, the senior unsecured ratings on the bonds issued by Sino-Ocean Land Treasure Finance I Limited, Sino-Ocean Land Treasure Finance II Limited and Sino-Ocean Land Treasure IV Limited, and guaranteed by Sino-Ocean; and (2) to Ba3 from Ba2, the rating on the subordinated, guaranteed perpetual capital securities issued by Sino-Ocean Land Treasure III Limited and guaranteed on a subordinated basis by Sino-Ocean.
Moody's has also changed the rating outlook on Sino-Ocean and its subsidiaries to negative from ratings under review. This concludes the rating review initiated on 28 June 2022.
"The rating downgrades reflect our expectation that support from China Life Insurance Co Ltd (China Life, insurance financial strength rating A1 stable), Sino-Ocean's largest shareholder, will reduce over time, as the deterioration in China's property market would reduce Sino-Ocean's economic and strategic importance to China Life," says Cedric Lai, a Moody's Vice President and Senior Analyst.
The expectation of lower support results in a reduction of the rating uplift from China Life to one notch from two notches previously.
"The negative outlook reflects Sino-Ocean's weakening standalone credit profile, driven by declining property sales, weak pricing flexibility due to its thin profit margin and deteriorating financial metrics amid challenging operating conditions," adds Lai.
RATINGS RATIONALE
Sino-Ocean's Ba1 rating incorporates its standalone credit profile and one notch of rating uplift, stemming from support from China Life, in times of need. This view also factors in China Life's ability to support Sino-Ocean, as illustrated by its A1 insurance financial strength rating (IFSR).
The support assumption has considered that Sino-Ocean remains an important equity investment of China Life in the real estate sector. China Life has invested in Sino-Ocean since 2009, and it is China Life's only investment in an associate in the real estate sector. However, Moody's expects the importance of real estate investment as an asset class for China Life would reduce over the next 12-18 months given the sector's high volatility.
Sino-Ocean's standalone credit strength reflects its long operating history in the property sector, focus on operating in high-tier Chinese cities, solid access to funding and diversified products, and its recurring income contribution from its investment property portfolio. However, Sin-Ocean's credit profile is constrained by the company's weakening sales and financial metrics, and constrained access to capital market funding.
Moody's expects Sino-Ocean's operating performance to weaken over the next 12-18 months amid difficult operating and funding conditions in China. Specifically, Moody's forecasts Sino-Ocean's contracted sales will decline around 25% to around RMB100 billion in 2022, from around RMB136 billion in 2021 due in part to a higher base in the second half of last year. The company's contracted sales decreased 18% during the first six months in 2022 to RMB43.0 billion compared with that during the same period in 2021.
Moody's expects Sino Ocean's gross margin to reduce to around 16%-17% over the next 12-18 months from 19% in 2021, as the company will likely offer certain price discounts to support its contracted sales amid the difficult market conditions. However, the company has limited pricing flexibility given its low margins.
Moody's forecasts the company's debt leverage, as measured by revenue/adjusted debt, will weaken to around 55%-60% over the next 12-18 months from 68% in 2021. Its interest coverage, as measured by adjusted EBIT/interest expenses, will decrease to 2.5x-2.6x over the next 12-18 months from 3.0x in 2021. These forecasts incorporate Moody's expectation of the company's higher debt and gross profit margin decline.
Moody's expects Sino-Ocean to maintain good liquidity. The company will have sufficient resources, including unrestricted cash and operating cash flow, to cover its maturing debt over the next 12 months. Its unrestricted cash/short-term debt coverage remained at 1.2x as of the end of 2021. However, the use of internal resources to repay maturing debt could continue to weaken its liquidity buffer over time.
Sino-Ocean's senior unsecured bond rating is not affected by subordination to claims at the operating company level. Despite Sino-Ocean's status as a holding company, Moody's expects support from China Life to Sino-Ocean to flow through the holding company rather than directly to its main operating companies, mitigating potential differences in expected losses that could arise from structural subordination.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's (1) strong shareholders and representation on its board of directors; (2) disclosure of material related-party transactions as required by the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange; and (3) diversified board of directors and four special committees to supervise the company's operations.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade the ratings if the company's sales fall significantly, liquidity weakens, or it undertakes aggressive debt-funded acquisitions that worsen its key credit metrics, such that reported net debt remains elevated, or EBIT/interest falls below 2.5x, on a sustained basis.
Moody's could also downgrade the ratings without a decline in the company's standalone credit profile, if Moody's further lowers its assessment of support from China Life for Sino-Ocean. This situation could result from any indication of a reduction in China Life's ownership of Sino-Ocean; further reduction of Sino-Ocean's economic and strategic importance to China Life; or a deterioration in China Life's own credit profile.
An upgrade of Sino-Ocean's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could revise the outlook to stable if (1) Sino-Ocean demonstrates resilience amid difficult operating conditions through stabilizing its business performance, maintaining its good liquidity and funding assess, as well as disciplined financial management; and (2) China Life continues to provide operational and financial support to Sino-Ocean, in times of need.
Credit metrics indicative of a stable outlook includes EBIT/interest above 3.0x on a sustained basis.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Sino-Ocean Group Holding Limited (Sino-Ocean) is a leading property developer in China. The company focuses on developing mid- to high-end residential properties, office premises and retail properties. As of the end of 2021, it had a land bank of about 53.14 million square meters across 63 cities mainly in China.
REGULATORY DISCLOSURES
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Cedric Lai
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
