Hong Kong, June 28, 2022 -- Moody's Investors Service has placed Sino-Ocean Group Holding Limited's (Sino-Ocean) Baa3 issuer rating on review for downgrade.
At the same time, Moody's has placed on review for downgrade (1) the Baa3 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, which are guaranteed by Sino-Ocean, and (2) the Ba2 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 changed the outlook to ratings under review from negative.
"The review for downgrade reflects Moody's expectation that Sino-Ocean's operating performance and credit metrics will likely weaken over the next 12-18 months amid the challenging operating environment. These factors will pressure the company's Baa3 ratings," says Cedric Lai, a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's expects Sino-Ocean's operating performance will weaken in the next 12-18 months amid difficult operating and funding conditions. Specifically, Moody's forecasts Sino-Ocean's contracted sales will decline to around RMB110 billion in 2022, from around RMB136 billion in 2021. The company will also likely offer price discounts to support its contracted sales amid the difficult market conditions, which will pressure its profit margins.
The company's contracted sales decreased 28% during the first five months in 2022 to RMB29.3 billion compared with the same period in 2021 because of tough operating conditions and pandemic-led disruptions during the period.
In addition, Moody's expects the company's debt leverage, as measured by revenue/adjusted debt, will weaken to around 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-2.7x 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. These credit metrics will pressure the company's standalone credit profile.
Sino-Ocean's Baa3 rating incorporates its standalone credit profile and two notches of rating uplift, reflecting Moody's expectation that China Life Insurance Co Ltd (China Life, insurance financial strength rating A1 stable) will continue to consider Sino-Ocean as a strategic investment and provide financial support to the company in times of need. This view also factors in China Life's strong ability to support Sino-Ocean, as illustrated by its A1 insurance financial strength rating (IFSR).
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 healthy at 1.2x as of the end of 2021.
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.
Moody's will review (1) Sino-Ocean's ability to improve its operating and financial profiles through the property market cycles; (2) the company's sales performance, operating cash flow generation and deleveraging progress; and (3) any signs of deterioration in China Life's support of the company.
Moody's could confirm Sino-Ocean's ratings if the company demonstrates a strong ability to improve its financial metrics and contracted sales in the near term. Credit metrics supportive of its existing rating include positive contracted sales growth, revenue/adjusted debt above 65%-70%, and reported gross profit margins above 20%-23%, all on a sustained basis.
However, Moody's could downgrade the ratings if it assesses that the company's contracted sales and financial metrics are unlikely to improve in the near term. Credit metrics that could lead to a downgrade include negative contracted sales growth, revenue/adjusted debt dropping below 60%-65%, or reported gross profit margins below 18%-20%.
Moody's could also downgrade the ratings without any decline in the company's standalone credit profile if it assesses that China Life's support of Sino-Ocean has lowered, as reflected by a reduction in China Life's ownership of the company or a deterioration in China Life's own credit profile.
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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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.
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
