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Rating Action:

Moody's revises Central China's rating outlook to negative, affirms Ba3/B1 ratings

 The document has been translated in other languages

02 Sep 2021

Hong Kong, September 02, 2021 -- Moody's Investors Service has changed the rating outlook on Central China Real Estate Limited (CCRE) to negative from stable.

At the same time, Moody's has affirmed CCRE's Ba3 Corporate Family Rating (CFR) and B1 senior unsecured ratings.

"The negative outlook reflects our expectation that CCRE's sales and financial metrics would weaken because of the challenging operating environment in CCREs' core markets and weakened access to offshore funding," says Kaven Tsang, a Moody's Senior Vice President.

"At the same time, the rating affirmation reflects our expectation that CCRE will have sufficient liquidity to address its refinancing needs amid volatile offshore debt capital markets, and CCRE's leading market position in its home Henan market," adds Tsang.

RATINGS RATIONALE

CCRE's Ba3 CFR reflects its leading market position and long operating track record in Henan province. The rating also takes into consideration its adequate liquidity.

However, CCRE's geographic concentration in Henan limits its operational flexibility and exposes it to regional economic and regulatory risks. The rating is also constrained by the execution risks and funding needs associated with the company's expansion plan, its exposure to joint ventures (JVs), and high reliance on offshore bond funding.

Moody's believes CCRE will face uncertainty in issuing new offshore bonds at reasonable funding costs to refinance its maturing debt in view of the volatile offshore debt capital markets, as well as the recent decline in its offshore bond prices.

The offshore bond market is CCRE's major funding channel, accounting for 65% of its total debt as of 30 June 2021.

CCRE will have two US dollar bonds, with a total amount of $900 million, maturing in November 2021 and August 2022. While the maturing offshore bonds represented 20% of CCRE's total debt as of 30 June 2021, Moody's expects the company to have sufficient internal resources to repay them. However, the repayment will reduce the funding available for its operations over the next 12-18 months. The company's financial flexibility will also be affected if weakness in the offshore debt capital markets persists.

CCRE's liquidity remains adequate. Moody's expects CCRE's RMB10.9 billion of unrestricted cash as of 30 June 2021, and cash flow generated from operations to fully cover its committed land payments, dividends as well as maturing debt over the next 12-18 months. The impact of a large decline in unrestricted cash as of 30 June 2021 is largely offset by a corresponding fall in short-term debt as of the same date.

Moody's forecasts the company's contracted sales will decline to RMB60 billion-RMB65 billion this year from RMB68.3 billion in 2020, considering disruptions to its property sales in Henan due to flooding and lockdowns in July and August, as well as weakened operating and tightened funding conditions. In the first seven months, the company achieved RMB33.3 billion of contracted sales, flat from the same period in 2020. It has sizable saleable resources of around RMB68.8 billion in the second half (H2), according to the company.

Moody's projects CCRE's leverage, as measured by revenue/adjusted debt, will weaken to around 105% over the next 12-18 months from 133% for the 12 months ended June 2021, because tight funding conditions could limit the company's project delivery pace and revenue growth in H2 2021 and 2022.

Meanwhile, the company's EBIT/interest coverage will fall to around 2.5x over the next 12-18 months from 3.2x for the 12 months ended June 2021, due to a potential decline in revenue and a likely increase in funding costs. CCRE's EBIT/interest coverage position is weak for its Ba3 CFR.

CCRE's B1 senior unsecured bond rating is one notch lower than its CFR because of the risk of structural subordination. This subordination risk reflects the fact that most of CCRE's claims are at the operating subsidiaries 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. As a result, the expected recovery rate for claims at the holding company will be lower.

In terms of environmental, social and governance (ESG) factors, Moody's has taken into account the concentration of CCRE's ownership in its controlling shareholder, Wu Po Sum, who had a 69.64% stake in the company as of 11 June 2021. The company's provision of financial guarantees to related parties will also increase its contingent liabilities and the risk of potential fund leakage.

These concerns are mitigated by the presence of special committees — in particular, the audit and remuneration committees — that are chaired by independent nonexecutive directors to oversee corporate governance; and the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong SAR, China in governing related-party transactions.

In terms of dividend payments, CCRE maintained a largely stable payout ratio at 30%-40% of attributable net income in 2018-20.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of the company's ratings is unlikely over the next 12 months, given the negative rating outlook.

However, the rating outlook could return to stable if the company restores its offshore funding access at reasonable funding costs and balances its funding channels with lower reliance on offshore funding, realizes business plan to grow its operating scale, improves its credit metrics and maintains adequate balance-sheet cash to support its liquidity.

The rating could be downgraded if CCRE's contracted sales, liquidity, profit margin or credit metrics worsen.

Any sign of an inability to refinance maturing debt, restore its offshore funding access, or balance its exposure to different types of funding channel while maintaining reasonable funding costs, could also pressure the company's ratings.

Deteriorating credit metrics that could trigger a rating downgrade include EBIT/interest coverage below 2.5x-3.0x, gross profit margins below 17.5%-20% or unrestricted cash/adjusted short-term debt below 1.0x-1.5x.

Downgrade pressure could also increase if the company's contingent liabilities associated with JVs or the risk of providing funding support to JVs increase materially. This could result from a significant deterioration in the financial strength and liquidity of its JV projects or a substantial increase in investments in new JV projects.

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.

Founded in 1992, Central China Real Estate Limited (CCRE) is a leading property developer in China's Henan province. As of 30 June 2021, the company's land bank totaled 56.21 million square meters in attributable gross floor area (GFA). The company was listed on the Hong Kong Stock Exchange in June 2008. CCRE's chairman, Wu Po Sum, owned a 69.64% stake in the company as of 11 June 2021.

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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.

Kaven Tsang
Senior Vice President
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

No Related Data.
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