Hong Kong, February 18, 2022 -- Moody's Investors Service has downgraded Zhongliang Holdings Group Company
Limited's (Zhongliang) corporate family rating (CFR) to B2 from
B1.
Moody's has also changed the outlook to negative from stable.
"The rating downgrade reflects Zhongliang's heightened refinancing risks
because of its weakened funding access and sizable debt maturities over
the next 12 months," says Cedric Lai, a Moody's Vice
President and Senior Analyst.
"The negative outlook reflects our expectation that the company's
operating and financial performance will weaken over the next 12-18
months amid a challenging operating environment," adds Lai.
RATINGS RATIONALE
Moody's has changed its assessment of Zhongliang's liquidity profile to
weak from adequate in view of the company's constrained access to funding
and deteriorated operations. In particular, Moody's
estimates Zhongliang's cash balance has declined notably as of the
end of 2021 due to its debt repayment and anticipates that the company's
unrestricted cash to short-term debt coverage ratio would decrease
below the level of 1.2x as of the end of June 2021.
In addition, the company has around USD1.1 billion of offshore
bonds maturing before the end of June 2023. It will likely not
be able to raise sizable new bonds at a reasonable cost to refinance its
maturing debt in the next 6-12 months, given its weakened
funding access. However, Moody's expects the company to repay
these maturing debts with its internal cash, though this would constrain
the funding available for its operations.
Moody's forecasts that Zhongliang's contracted sales will fall over the
next 6-12 months, driven by weak homebuyer confidence amid
tight funding conditions. The decline in contracted sales will
also weaken the company's financial profile and reduce its operating cash
flow and, in turn, its liquidity. Zhongliang's contracted
sales fell 25% and 39% year-on-year in the
fourth quarter of 2021 and January 2022, respectively.
Moody's expects Zhongliang's interest coverage, measured by EBIT/interest
coverage, to decrease to 2.5x-2.6x over the
next 12-18 months, from 2.9x for the 12 months ended
June 2021, driven by slower revenue recognition and declining profit
margins given the company will likely offer price discounts to accelerate
sales. On the other hand, Moody's forecasts that the company's
debt leverage, as measured by revenue/debt, will stay around
90%-95% over the same period given the expected debt
reduction.
Zhongliang's B2 CFR reflects the company's recognized brand name in second-tier
and lower-tier cities in the Yangtze River Delta region and its
solid sales execution.
On the other hand, Zhongliang's rating is constrained by its high
exposure to lower-tier cities, reliance on non-bank
financing and short-term offshore funding. In addition,
the company has a material exposure to joint venture (JV) businesses,
which hinders the transparency of its credit metrics.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the risk associated with the ownership concentration
in Zhongliang's controlling shareholders, Mr. Yang Jian and
his spouse, who together held an 82.9% stake as of
30 June 2021. Moody's has also considered (1) the presence of three
independent non-executive directors on a board of seven directors,
and two independent non-executive directors who chair the audit
and remuneration committees, respectively, and (2) the company's
moderate 30%-40% dividend payout ratio over the past
two years; (3) the application of the listing rules of the Hong Kong
Stock Exchange and the Securities and Futures Ordinance in Hong Kong.
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 the outlook to stable if Zhongliang
improves access to funding and operating cash flow, as well as strengthens
its liquidity.
On the other hand, Moody's could downgrade the rating if (1) the
company's contracted sales and cash collections decline further;
and (2) the company's liquidity profile significantly deteriorates.
Credit metrics indicative of a downgrade include unrestricted cash to
short-term debt falling below 1x and EBIT/interest coverage below
2.0x, 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.
Zhongliang Holdings Group Company Limited is a Shanghai-based residential
property developer in China. The Yangtze River Delta region contributed
around 58% of the company's contracted sales in the first half
of 2021.
As of 30 June 2021, Zhongliang was 82.9% owned by
its chairman, Mr. Yang Jian, and his spouse,
who was acting in concert.
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
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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.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
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