Hong Kong, February 10, 2021 -- Moody's Investors Service has today downgraded Zensun Group Limited's
(Zensun) corporate family rating (CFR) to B2 from B1.
At the same time, Moody's has downgraded to B3 from B2 the
backed senior unsecured rating on the notes issued by Zensun Enterprises
Limited — a listed subsidiary of Zensun— and guaranteed by
Zensun.
All rating outlooks have been changed to stable from negative.
"The downgrade reflects Zensun's weak sales performance and cash
collection that have been below our expectation and are unlikely to show
material improvement in the next 1-2 years in view of its small
land bank and tight credit conditions in China's property sector,"
says Celine Yang, a Moody's Assistant Vice President and Analyst.
"The downgrade also reflects the heightened business execution risks
associated with its planned expansion outside its core Zhengzhou market,
including to low-tier cities in Henan province, where housing
demand is generally more uncertain as compared with Zhengzhou, the
provincial capital," adds Yang, also Moody's lead analyst
for Zensun.
In addition, the lower availability of bank funding in low-tier
cities could potentially constrain the company's cash flow generation
and liquidity, and in turn limit its ability to pursue sales growth
plan.
RATINGS RATIONALE
Zensun's B2 CFR reflects the company's (1) established brand name and
leading market position in Zhengzhou; and (2) established track record
of urban redevelopment projects in the city, supporting the company's
ability to acquire new contracts for redevelopment projects in Zhengzhou.
However, Zensun's B2 CFR is constrained by the company's moderate
operating scale with high geographic concentration in Henan province,
the increased execution risks associated with its expansion outside of
its home market, and its small land bank, which results in
higher requirement than peers to replenish its land bank to support sales.
Moody's estimates that Zensun had only around 9 million square meters
(including around 20% underground floor area) as of 31 December
2020, as measured by gross floor area (GFA), which can only
cover around two years of sales.
With this constraint, Moody's expects Zensun's contracted
sales will decline slightly to RMB30 billion in 2021.
Moody's estimates that Zensun's property sales in 2020 declined
around 12%-13% from RMB37.5 billion in 2019
(not including resettlement housing sales). This performance is
weaker than Moody's original expectation and lags the 10.8%
national property sales growth. Additionally, its cash collection
rate remained weak at around 65% in 2020, versus 62%
in 2019. Such performance and operating scale positions the company's
CFR more appropriately at the B2 level.
However, Zensun has scaled down its land acquisitions in the past
1-2 years to preserve liquidity and control its debt leverage.
Moody's expects the company will maintain such liquidity and financial
management practice, and keep its key credit metrics largely stable
and appropriate for its B2 CFR.
Zensun's liquidity is adequate. Moody's expects the
company's cash holding and operating cash flow can fully cover its
maturing debt and committed land payments in the next 12-18 months.
However, the company's liquidity will weaken if it is unable
to execute its sales plan in the next 12-18 months or if it adopts
a more aggressive land banking strategy to pursue growth.
The B3 senior unsecured bond rating is one notch lower than Zensun's
CFR because of structural subordination risk. Most of Zensun's
claims are at the subsidiary level 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.
In terms of environmental, governance and social (ESG) factors,
Moody's has considered the company's private company status and concentrated
ownership. It has in the past also undertaken a significant amount
of related party transactions with Zhenyang Construction (ZYC),
a subsidiary of Zensun. However, Moody's expects its
transactions with ZYC will be subject to the regulatory corporate governance
standards of Hong Kong Stock Exchange, as Zensun continues to develop
new projects under its Hong Kong listed subsidiary, Zensun Enterprises
Limited. Henan Hongguang Zensun Real Estate Co., Ltd,
its core onshore subsidiary, is also subject to onshore disclosure
requirements due to its issuance of onshore bonds. These two subsidiaries
account for over 85% of its Zensun's total asset as of end
of June 2020. In addition, Zensun has not paid out dividends
in the past three years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Zensun will
maintain adequate liquidity and ongoing access to various onshore and
offshore funding channels in the coming 12-18 months. Moody's
also expects Zensun will maintain its business scale and meaningfully
improve its cash collections over the same period.
Moody's could upgrade Zensun's ratings if it (1) achieves sustained
growth in both contracted sales (excluding resettlement sales) and revenue
without sacrificing its profit margin significantly; (2) improves
its land bank size and diversifies its geographic coverage without compromising
its liquidity; and (3) strengthens its liquidity position,
with cash to short-term debt consistently above 1.0x,
while maintaining its credit metrics largely stable.
On the other hand, Moody's could downgrade the ratings if (1) Zensun
fails to execute its business plans and maintain a largely stable operating
scale; (2) its liquidity deteriorates due to its inability to improve
its sales or cash collection, or its pursuance of an aggressive
land acquisition strategy; or (3) its credit metrics weaken materially.
Credit metrics indicative of a downgrade include EBIT/interest coverage
falling below 1.5x or cash to short-term debt failing to
trend towards 1.0x over the next 12-18 months.
Any signs of weakening in access to funding will also pressure Zensun's
ratings.
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.
Zensun Group Limited is a residential developer based in Zhengzhou,
China. The company is 100% owned by Ms. Huang Yanping
and Mr. Zhang Jingguo. At 31 December 2020, Zensun's
land bank totaled around 9 million square meters of saleable gross floor
area (including around 20% underground floor area).
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YuYing (Celine) Yang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Franco Leung
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Kaven Tsang
Senior Vice President
Corporate Finance Group
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