Hong Kong, April 09, 2020 -- Moody's Investors Service has today placed on review for downgrade Yuzhou
Properties Company Limited's Ba3 corporate family rating (CFR) and
B1 senior unsecured debt ratings.
The outlook was changed to ratings under review from stable.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
"The review for downgrade of Yuzhou's ratings reflects our concerns
over the company's ability to improve its credit metrics to levels
appropriate for its Ba3 CFR amid weakening economic conditions,
given the company's continued debt growth to fund its business expansion,"
says Celine Yang, a Moody's Assistant Vice President and Analyst.
Moody's expects the company's leverage, as measured
by revenue/adjusted debt, will trend towards 45%-50%
over the next 12-18 months. At the same time, its
interest coverage, as measured by adjusted EBIT/interest,
will likely gradually improve to 2.5x over the next 12-18
months as the company recognizes more pre-sold properties.
However, Yuzhou's credit metrics remain weak for its Ba3 CFR,
even after taking into consideration the increasing contribution from
its joint-venture and associates companies, which are not
consolidated into its financials.
Yuzhou's leverage weakened to 35.8% in 2019 from 44.6%
in 2018, due to its continued debt-funded growth and a slight
decline in recognized revenue. At the same time, its EBIT/interest
weakened to 2.0x from 3.0x during the same period,
driven by higher debt and an approximate 4.5 percentage point decline
in its gross margin.
Moody's review will focus on (1) Yuzhou's willingness and ability
to deleverage, (2) its ability to maintain sales growth and improve
revenue recognition; (3) its ability to maintain good liquidity to
address its maturing debt in the coming 12-18 months, including
puttable bonds.
An upgrade is unlikely given the review for downgrade.
However, the ratings could be confirmed if Yuzhou (1) maintains
good liquidity, (2) executes its contracted sales growth while maintaining
stable margins, and (3) improves its credit metrics, with
revenue/adjusted debt trending to 60%-65% and EBIT/interest
coverage exceeding 2.5x-3.0x on a sustained basis.
A material reduction in contingent liabilities associated with joint ventures,
or lower risks of providing funding support to joint ventures could also
be positive to the ratings. This could be a result of reduced usage
of joint ventures or material improvement in the financial strengths of
its joint venture projects.
Moody's could downgrade the rating if its contracted sales growth,
liquidity, profit margin or credit metrics weaken. Credit
metrics indicative of a downgrade include (1) cash/short-term debt
below 1.5x, (2) EBIT interest coverage below 2.5x,
and (3) revenue/adjusted debt failing to trend back to 60%,
all on a sustained basis.
Moody's could also downgrade the rating if the company's contingent liabilities
associated with joint ventures increase materially, or if there
is a heightened risks that it will need to provide funding support to
joint ventures. This could be the result of a material deterioration
in the financial strengths and liquidity of its joint venture projects
or a substantial increase in investment in new joint venture projects.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentrated ownership in its controlling shareholder,
Mr. Lam Lung On, who held a 57.38% stake in
the company as of 31 December 2019 and Yuzhou's relatively high
dividend payout ratio of 46.8% in 2019 compared to 35%-36.5%
in the previous four years.
Yuzhou's CFR also takes into consideration the presence of internal
governance structures and disclosure standards, as required under
the Corporate Governance Code for companies listed on the Hong Kong Stock
Exchange. The company has three special committees; the Audit
Committee, the Remuneration Committee and the Nomination Committees,
which are all chaired by an independent non-executive director.
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.
Yuzhou Properties Company Limited is a property developer that focuses
on residential housing in the Yangtze River Delta and the West Strait
Economic Zone. Established in Xiamen in the mid-1990s,
Yuzhou is one of the city's largest developers. The company moved
its headquarters to Shanghai in 2016.
Yuzhou listed its shares on the Hong Kong Stock Exchange in 2009.
At 31 December 2019, Yuzhou's land bank totaled 20.12 million
square meters in saleable gross floor area.
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YuYing (Celine) Yang
Asst Vice President - 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
