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.
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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.)
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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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