Hong Kong, February 22, 2022 -- Moody's Investors Service has revised the rating outlooks of Seazen Group
Limited, Seazen Holdings Co., Ltd. and New Metro
Global Limited to negative from stable.
At the same time, Moody's has affirmed Seazen Group Limited's Ba1
corporate family rating (CFR), its Ba2 senior unsecured rating,
and the Ba2 backed senior unsecured rating on the bonds issued by New
Metro Global Limited and guaranteed by Seazen Group.
Moody's has also affirmed Seazen Holdings Co., Ltd.'s
Ba1 CFR and the Ba1 backed senior unsecured rating on the bonds issued
by New Metro Global Limited and guaranteed by Seazen Holdings.
Seazen Holdings is a 67%-owned subsidiary of Seazen Group,
accounting for 99% of Seazen Group's revenues in the first half
of 2021 and 89% of its debt as of June 2021. The two companies
are collectively referred to as "Seazen".
"The negative outlooks reflect Moody's expectation of Seazen's
shrinking property sales and weakening credit metrics over the next 12-18
months, amid difficult operating and funding conditions,"
says Kelly Chen, a Moody's Assistant Vice President and Analyst.
"The rating affirmations reflect Seazen's good liquidity profile
and the company's continuing rental income growth that will support
its cash flow stability," adds Chen.
RATINGS RATIONALE
Moody's expects Seazen's contracted sales and revenue recognition
will weaken in the next12-18 months amid difficult operating and
funding conditions.
Specifically, Moody's expects Seazen's gross contracted
sales will decline to around RMB185 billion and RMB180 billion in 2022
and 2023 respectively, after recording a 7% decline to RMB234
billion in 2021. The company will likely offer price discounts
to support its contracted sales amid the difficult market conditions,
thereby pressuring its profit margins.
As a result, Seazen Group's EBIT/interest coverage will fall
to around 3.5x in the next 1-2 years from 4.7x for
12 months that ended June 2021. Its debt leverage, as measured
by revenue/adjusted debt, will weaken to around 140% from
148% over the same period. The company's weakening
metrics and weakened access to offshore bond markets would weakly position
the company at the Ba1 CFR.
On the other hand, Seazen Group's recurring rental income
(excluding commercial properties management fee) will continue to grow
to around RMB5.0 billion and RMB5.5 billion in 2022 and
2023 respectively, from RMB3.7 billion in the last twelve
months ended June 2021, driven by opening and ramp up of new Wu
Yue Plazas over the same period. As a result, its rental
income/interest coverage will improve to 80%-85%
in the next 1-2 years from 52% for the 12 months that ended
June 2021. This coverage position could temper the concerns over
the weakening of Seazen Group's other credit metrics.
Moody's expects Seazen Group will maintain good liquidity.
The company had unrestricted cash of RMB53 billion as of June 2021.
Although part of the cash would have to be kept at the project level to
support its operations, Moody's expects Seazen Group will
have sufficient resources, including unrestricted cash, operating
cash flow and proceeds from recent rights issues , to fully cover
its maturing debt through the second quarter of 2023 without access to
external funding for refinancing. The company's investment
property portfolio would also provide it with some flexibility to raise
funding such as secured loans from onshore banks.
However, Seazen will likely need to use its internal resources to
repay at least part of its maturing USD1.3 billion of offshore
bonds in 2022, given its constrained access to the offshore bond
market. This will reduce Seazen's financial flexibility and
funding available to support its operations.
Seazen's Ba1 CFRs reflect the company's solid sales execution,
growing stream of recurring rental income that supports its cash flow
stability, and good liquidity.
However, the Ba1 CFR is constrained by Seazen's narrow profit
margin, weakened access to debt capital market funds, and
significant exposure to its joint ventures (JVs), which increases
the company's contingent liabilities and limits its corporate transparency.
From a governance perspective, the companies' ownership is concentrated
in its former chairman, who holds a 70.3% stake in
Seazen Group, which in turn owns 67.1% in Seaszen
Holdings. This risk is mitigated by the companies' established
management team as well as their good institutional governance structures
and standards as required by the Hong Kong and Shanghai stock exchanges,
on which the companies are, respectively, listed.
Seazen Group's Ba2 senior unsecured bond rating is one notch lower than
its CFR because of structural subordination risk. Most of Seazen
Group's claims are at the subsidiary level 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.
The Ba1 senior unsecured rating on the bond issued by New Metro Global
Limited and guaranteed by Seazen Holdings reflects the senior unsecured
rating is not affected by the subordination to claims at the operating
company level, because the structural subordination risk is mitigated
by business diversification. Although it is an intermediate holding
company with most claims at the operating subsidiaries and project level,
creditors of Seazen Holdings benefit from the group's diversified business
profile, with cash flow generation across a large number of operating
subsidiaries with high geographic diversification as well as an investment
property portfolio generating stable rental income.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Seazen Group's and Seazen Holdings' ratings
is unlikely, given the negative outlook. However, Moody's
could return the rating outlooks to stable if the companies' access
to offshore bond funding normalizes, and if they can improve contracted
sales, strengthen credit metrics, and maintain rental income
growth and good liquidity.
Credit metrics that could indicate stable rating outlooks include EBIT/interest
coverage recovering toward 4.0x, revenue/adjusted debt above
80%, rental income/interest above 50%, and unrestricted
cash/short-term debt above 125%, all on a sustained
basis.
Moody's could downgrade Seazen Group's and Seazen Holdings'
ratings if the companies' access to funding deteriorates; their
contracted sales decline materially or they pursue aggressive growth,
such that their credit metrics weaken with their EBIT/interest coverage
unlikely to return to 4.0x, their revenue/adjusted debt falling
below 75%-80%, or their rental income/interest
declining below 50%, all on a sustained basis.
Downward pressure could also increase if the companies' liquidity weakens,
as reflected by their unrestricted cash/short-term debt falling
below 125% and their contingent liabilities associated with their
JVs or the likelihood of them providing funding support to the JVs increases
significantly.
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.
Seazen Group Limited operates through its 67.1%-owned
mainland subsidiary, Seazen Holdings, and engages primarily
in residential development in China. Seazen Group was founded in
1996 by Wang Zhenhua, the former chairman of Seazen Group and Seazen
Holdings. Wang Zhenhua is the largest shareholder of Seazen Group,
holding a 70.3% stake in the company, and has been
involved in the property development business in China (A1 stable) since
1993. The company had a land bank spread over 115 cities in China,
with a total gross floor area (GFA) of 150 million square meters at the
end of June 2021.
REGULATORY DISCLOSURES
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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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Chen Chen
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
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JOURNALISTS: 852 3758 1350
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