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Rating Action:

Moody's revises Longfor's outlook to positive

 The document has been translated in other languages

30 Apr 2019

Hong Kong, April 30, 2019 -- Moody's Investors Service ("Moody's") has today revised to positive from stable the outlook for Longfor Group Holdings Limited ("Longfor").

At the same time, Moody's has affirmed Longfor's Baa3 issuer and senior unsecured ratings.

RATINGS RATIONALE

"The revision to positive for Longfor's outlook reflects our expectation that the improvement in the company's financial metrics will be sustained at levels that are strong when compared with its Baa3-rated Chinese property peers over the next 12-18 months," says Kaven Tsang, a Moody's Senior Vice President.

"Furthermore, Longfor will continue to grow its investment property portfolio, which will further strengthen the company's cash flow stability and debt servicing abilities," adds Tsang, who is also Moody's Lead Analyst for Longfor.

Specifically, Moody's expects Longfor's revenue/adjusted debt will improve to 100%-105% over the next 12-18 months from around 96% in 2018.

Meanwhile, its EBIT/interest will remain strong at 7.0x-7.5x over the next 12-18 months — despite a slight decline in its profit margin — compared with 7.4x in 2018.

Moody's also expects that Longfor's rental income/gross interest will continue to rise to around 95% over the next 12-18 months from 84% in 2018.

These financial metrics are strong when compared with its Baa3-rated Chinese property peers.

Longfor's financial strength is a result of its balanced approach towards business growth, cash flow stability and disciplined financial management.

The company has prudent sales growth and land bank expansion targets, with an aim to control its debt growth and risks. It has also carefully scaled its construction progress according to market demand.

Moody's expects that Longfor will grow its contracted sales — including its share in joint ventures — to RMB240 billion in 2020 from RMB200 billion in 2018. Meanwhile, its rental income will grow to RMB6.5-RMB7.0 billion over the next 12-18 months from RMB4.1 billion in 2018.

Additionally, the company will control its year-over-year debt growth at around 15%-20% per annum over the 12-18 months from its total reported debt of RMB119.8 billion at 31 December 2018.

Longfor's Baa3 issuer rating reflects its strong brand name, good geographic diversification and track record of resilient sales growth through cycles. The company has an adequately balanced land bank across major regions in China (A1 stable), which can support business growth over the next three to four years.

Longfor's growth strategy in residential development will expose the company to industry cyclicality and execution risks, as well as increased funding needs. However, the company's prudent approach to financial management and good access to bank lending and the capital markets would buffer it against stress during a market downturn.

Longfor's liquidity is strong, underpinned by its prudent liquidity management, strong ability to generate operating cash flow and good access to funding. Its cash/short-term debt was strong at 3.85x at 31 December 2018.

Moody's expects that the company's cash holdings and operating cash flow will be sufficient to cover its short-term debt and total committed outstanding land payments over the next 12 months.

Longfor's issuer and senior unsecured ratings are unaffected by subordination to claims at the operating company level. This is because despite its status as a holding company with a majority of claims in the operating subsidiaries, creditors of Longfor benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries and different business segments in property development, retail mall and apartment leasing. Such business diversification mitigates structural subordination risk.

Upward ratings pressure could emerge if Longfor grows its operating scale while (1) maintaining a strong liquidity position, with its cash/short-term debt of more than 2.5x; (2) improving its revenue/debt to more than 105%-115% and EBIT/interest to more than 6.0x; or (3) strengthening its recurring rental income/interest coverage to above 95%-100%.

A ratings downgrade is unlikely given the positive outlook.

However, Moody's could revise the outlook to stable if the company shows (1) a significant deterioration in sales; (2) a weakening in its liquidity position, with its cash/short-term debt below 1.5x; or (3) a more aggressive debt-funded expansion that results in a weakening in its credit metrics, such that revenue/debt fails to trend towards 105%, EBIT/interest falls below 5.5x-6.0x on a sustained basis, or recurring rental income/interest coverage fails to progress towards 95%.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Longfor Group Holdings Limited is a leading developer in China's residential and commercial property development sector. Founded in 1994, the company began its business in Chongqing and has since established a solid brand name in the Chongqing municipality.

As of 31 December 2018, Longfor had an attributable land bank of 45.6 million square meters in gross floor area, spanning 44 cities in five major regions in China.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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