Hong Kong, August 31, 2020 -- Moody's Investors Service has revised to positive from stable the
rating outlook of Powerlong Real Estate Holdings Limited.
At the same time, Moody's has affirmed Powerlong's B1 corporate
family rating and its B2 senior unsecured debt ratings.
RATINGS RATIONALE
"The change in outlook to positive reflects our expectation that Powerlong's
credit metrics will improve over the next 12-18 months, driven
by strong revenue recognition as well as good profit margins," says
Cedric Lai, a Moody's Vice President and Senior Analyst.
"We also expect Powerlong's growing investment property portfolio
will strengthen its recurring rental income, in turn supporting
its cash flow stability and profitability", adds Lai.
Powerlong's total contracted sales grew 11.3% to RMB39.0
billion in the first seven months of 2020 compared with last year despite
disruptions from the coronavirus outbreak, after robust 47%
year-on-year growth to RMB60.4 billion for the full
year 2019. Moody's expects its contracted sales will increase in
2020 to around RMB70 billion when compared with 2019, supported
by good sales execution abilities and its focus on the economically strong
Yangtze River Delta region with robust housing demand.
Such contracted sales growth will help fund the company's business expansion
and will support revenue growth and liquidity over the next 12-18
months.
Moody's further estimates that the company's gross profit margin will
remain around 34% over the coming 12-18 months because of
its low-cost land bank. Its low land costs provide the company
with pricing flexibility.
Consequently, Moody's expects Powerlong's debt leverage --
as measured by revenue/adjusted debt - will improve to 55%-65%
over the next 12-18 months from around 50% for the 12 months
ended June 2019. Similarly, Moody's expects adjusted EBIT/interest
will remain strong at 3.0x-3.4x from about 2.9x
over the same period.
Moody's expects that Powerlong's rental income will grow 25% annually
to around RMB2.1 billion over the next 12-18 months from
RMB1.9 billion in 2019, underpinned by the scheduled opening
of its new retail malls. The company plans to open ten retail malls
in the second half of 2020, and a further 13 malls in 2021.
This will support its rental income growth and strengthen its capability
to service interest payments.
Powerlong's B1 corporate family rating (CFR) reflects its (1) track record
of developing and selling commercial and residential properties;
(2) growing recurring revenue, which improves the stability of its
debt servicing; and (3) expansion into cities with strong economic
fundamentals where demand for its properties is more favorable.
However, the company's credit profile is constrained by the execution
risk related to its business expansion, the high capital needs associated
with its business strategy and its moderate debt leverage.
The B2 senior unsecured debt rating is one notch lower than the corporate
family rating due to structural subordination risk. This risk reflects
the fact that the majority of claims are at the operating subsidiaries
and have priority over Powerlong's senior unsecured claims in a bankruptcy
scenario. In addition, the holding company lacks significant
mitigating factors for structural subordination. As a result,
the likely recovery rate for claims at the holding company will be lower.
Powerlong's liquidity is good. Its cash holdings of RMB26.4
billion as of 30 June 2020 could fully cover its short-term debt
of RMB22.9 billion. Moody's expects the company's cash holdings,
together with expected operating cash inflow, will be able to cover
its committed land purchases, dividend payments, as well as
capital spending and payables for its previous acquisitions, over
the next 12-18 months.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the company's concentrated ownership in its controlling
shareholder, Hoi Kin Hong and Hoi Wa Fong, who held a 59%
stake in the company as of 30 June 2020.
Moody's has also considered (1) the fact that independent directors chair
the audit and remuneration committees; (2) the low level of related-party
transactions and dividend payouts; and (3) the presence of other
internal governance structures and standards as required by the Hong Kong
Exchange.
Moody's regards the impact of the deteriorating global economic
outlook amid the rapid and widening spread of the coronavirus outbreak
as a social risk under its ESG framework, because of the substantial
implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if Powerlong continues to grow
in scale while maintaining its adequate liquidity and sound credit metrics,
and improves its debt leverage to a level that matches its business model
of holding investment properties. Credit metrics that could trigger
a ratings upgrade include: (1) adjusted EBIT/interest rising above
3.0x; and (2) revenue/adjusted debt in excess of 60%-65%.
A rating downgrade is unlikely, given the positive outlook.
However, Moody's could revise Powerlong's outlook to stable if the
company's sales weaken or if it pursues a more aggressive expansion strategy
that weakens its credit metrics. Credit metrics that could trigger
a ratings downgrade include: (1) adjusted EBIT/interest falling
below 2.5x; (2) revenue/adjusted debt failing to trend toward
55%..
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.
Powerlong Real Estate Holdings Limited is a Chinese property developer
focused on building large-scale integrated residential and commercial
properties in China. The company listed on the Hong Kong Exchange
in October 2009. The founding Hoi family held a 59% stake
in the company at 30 June 2020.
At 30 June 2020, Powerlong's land bank for development totaled around
28.6 million square meters in gross floor area under development
and for future development.
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.
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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
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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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
