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Rating Action:

Moody's downgrades Tahoe Group's CFR to B2; outlook stable

 The document has been translated in other languages

04 May 2018

Hong Kong, May 04, 2018 -- Moody's Investors Service has downgraded to B2 from B1 the corporate family rating of Tahoe Group Co., Ltd (Tahoe), and to B3 from B2 the backed senior unsecured rating to the notes issued by Tahoe Group Global (Co.,) Limited — a wholly owned subsidiary of Tahoe — and guaranteed by Tahoe.

At the same time, Moody's has changed the outlook on all ratings to stable from negative.

RATINGS RATIONALE

"The ratings downgrade reflects our expectation that Tahoe's ability to deleverage over the next 12 to 18 months is slower than we had expected, while the refinancing pressure that it faces from its maturing onshore shadow banking loans and puttable onshore bonds has increased," says Franco Leung, a Moody's Senior Vice President.

Moody's explains that Tahoe's high leverage has been driven by its debt-funded expansion and slower than expected cash collection on property sales.

Tahoe has a track record of strong sales execution, which has enabled it to grow to a scale larger than many single B-rated Chinese property developers.

However, Moody's estimates that the company's level of cash collection from property sales was one of the lowest among B-rated developers in China during 2017, despite reporting strong sales growth of 170% year-over-year to RMB100.7 billion. At the same time, the company's high land replenishment requirements — driven by its fast business expansion plans — contributed to a significant increase in its reported debt to around RMB136 billion at the end of 2017 from around RMB75 billion at the end of 2016.

Accordingly, the company's debt leverage — as measured by revenue/adjusted debt — weakened to around 17% in 2017 from around 25% in 2016.

Its interest coverage remained at around 1.4x in 2017, because an increase in gross profit margins to 25.6% in 2017 from 17.4% in 2016 offset the higher interest expenses arising from the increased debt.

Nevertheless, Moody's expects that the company' revenue/adjusted debt will gradually improve towards 25% and interest coverage will trend towards 1.5x, as Tahoe strives to control its debt growth and improve its cash collection.

In addition, Tahoe increased its short-term debt to support business expansion, which increased in turn its refinancing pressure amid tight onshore credit conditions. The company's cash balance of around RMB16.6 billion at 31 December 2017 was inadequate to cover its short-term debt of around RMB43 billion and unpaid land premiums. Its short-term debt to total debt increased to about 32% at the end of 2017 from around 25% at the end of 2016.

Moody's expects that Tahoe will be able to address its refinancing needs by substantially improving its cash collection and operating cash flow, while continuing to diversify its funding channels, as evidenced by its recent offshore bond issuance totaling $655 million between Q1 2018 and Q4 2017.

The ratings outlook is stable, reflecting Moody's expectation that Tahoe will: (1) achieve its contracted sales target and substantially improve its cash collection level; (2) manage the refinancing of its short-term debt; and (3) adopt a more measured approach to land acquisitions and reduce its debt leverage positions over the next 12 to 18 months.

Tahoe's B2 corporate family rating reflects the company's strong sales execution on residential and commercial properties in the key regions that it operates. The rating also reflects the company's large business scale relative to many B-rated Chinese developers, and wide product offerings, ranging from those catering to the mass market to mid-end and ultra-high-end properties. These factors contribute to the company's high business growth.

The company's capital structure is modestly diversified, and it has maintained a good track record of accessing the domestic debt and equity capital markets. Moody's expects that Tahoe's good access to funding will support its capital needs for ongoing business development.

On the other hand, its B2 corporate family rating also reflects its rapid growth ambitions, including expansion into new markets, which increases financial and execution risk.

Tahoe's B2 corporate family rating is constrained by its weak financial metrics and liquidity, in particular, its high debt leverage, as a result of sizable land acquisitions, construction spending requirements and slow cash collection.

Tahoe's ratings could be upgraded in the medium term, if it: (1) substantially improves its liquidity position, such that cash to short-term debt is above 1.25x on a sustained basis; and (2) materially improves its credit metrics, with EBIT/interest coverage above 2x and revenue/adjusted debt above 50%-55% on a sustained basis.

On the other hand, downward ratings pressure could increase, if Tahoe cannot improve its cash collection and liquidity position, such that cash to short-term debt fails to trend above 1x, or the company fails to improve its credit metrics.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Tahoe Group Co., Ltd listed on the Shenzhen Stock Exchange in 2010. The company began its first residential property project in Fuzhou in Fujian Province in 1996. Its operations are mainly focused on home property developments. It is also engaged in commercial property developments.

At 31 December 2017, the company's land bank totaled around 14 million square meters by saleable gross floor area.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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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.

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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.

Franco Leung
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

Gary Lau
MD - Corporate Finance
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

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