Hong Kong, April 06, 2022 -- Moody's Investors Service has downgraded Zhongliang Holdings Group Company Limited's (Zhongliang) corporate family rating (CFR) to B3 from B2.
The outlook remains negative.
"The rating downgrade reflects Zhongliang's weakened liquidity and heightened refinancing risks driven by its weak operating cash flow and sizable debt maturities over the next 12-18 months," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"The negative outlook reflects the uncertainties over the company's weakening liquidity to address its refinancing needs," adds Lai.
RATINGS RATIONALE
Moody's expects Zhongliang's contracted sales to decline over the next 6-12 months because of weak consumer sentiment and challenging operating conditions. This will reduce the company's operating cash flow and, in turn, its liquidity. Zhongliang's contracted sales fell 39% and 62% year-on-year in January and February 2022, respectively.
The company will likely lower selling prices to push sales, pressuring its profit margin over the next 12 months.
In addition, Moody's expects Zhongliang's liquidity to weaken over the next 12 months as it will use internal resources to repay the maturing debt absent any new fund raising amid the tough funding environment. In particular, the company still has around USD900 million of offshore bonds maturing before the end 2022. The company's unrestricted cash to short-term debt declined to 1.04x as at end 2021 from 1.2x as at end June 2021.
However, Moody's believes the company will scale down land acquisitions and business operations, as well as control expenses to preserve liquidity.
Moody's expects Zhongliang's interest coverage, measured by EBIT/interest coverage, decrease to around 2.3x over the next 12-18 months from 2.5x in 2021, driven by slower revenue recognition and declining profit margins during the same period.
Zhongliang's B3 CFR reflects the company's solid sales execution and recognized brand name in second-tier and lower-tier cities in the Yangtze River Delta region. On the other hand, Zhongliang's rating is constrained by its weak liquidity, relatively high exposure to lower-tier cities and reliance on non-bank financing. In addition, the company has a material exposure to joint venture (JV) businesses, which hinders the transparency of its credit metrics.
Moody's notes that Zhongliang's auditor, Ernst & Young, indicated in its financial result announcement of 2021 the existence of material uncertainty in the company's ability to continue as a going concern. Moody's expects such an incident to weaken investors' confidence and the company's access to funding.
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 80.5% stake as of 31 December 2021. Moody's has also considered 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 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 of Zhongliang's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could change the outlook to stable if Zhongliang improves its liquidity and access to funding; balances its funding channels with lower reliance on offshore funding; and strengthens sales, profitability and credit metrics through the next 12-18 months.
On the other hand, Moody's could downgrade Zhongliang's ratings if its liquidity deteriorates further.
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. The company engages in real estate development in China. The Yangtze River Delta region contributed 52.2% of the company's contracted sales in 2021.
As of 31 December 2021, Zhongliang was 80.5% owned by its chairman, Mr. Yang Jian and his spouse, who were acting in concert.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
