Hong Kong, October 05, 2020 -- Moody's Investors Service has revised the outlook on Shimao Group Holdings
Limited (Shimao) to positive from stable.
At the same time, Moody's has affirmed the Ba1 corporate family
rating (CFR) of Shimao.
"The change in outlook to positive from stable reflects our expectation
that Shimao's credit metrics will improve over the next 12-18
months, supported by its strong sales in the past 1-2 years
and its controlled debt growth," says Celine Yang, a Moody's
Assistant Vice President and Analyst.
"In addition, the positive outlook reflects our expectation that
it will exercise prudent financial discipline while pursuing a balanced
growth in property development and non-property development businesses,"
adds Yang, who is also Moody's Lead Analyst for Shimao.
RATINGS RATIONALE
Shimao's Ba1 CFR reflects its (1) strong sales execution through the property
cycles, (2) good geographic coverage and product mix with diversified
land reserves, (3) large operating scale and status as one of the
top developers in China in terms of contracted sales. The CFR also
reflects Shimao's growing income from its portfolio of quality investment
properties and hotels, as well as its track record of strong access
to domestic and offshore funding.
On the other hand, the rating is constrained by the company's execution
risk in its fast expansion in non-property development business
and ongoing funding needs associated with its business growth, as
well as its moderate credit metrics, although these metrics are
likely to improve gradually over the next 12-18 months.
Moody's expects Shimao will grow its contracted sales by around 10%-15%
over the next 12-18 months, backed by its sufficient salable
resources for H2 2020 and 2021 and proven execution capability.
Its strong market position and access to funding also position it well
to benefit from the ongoing industry consolidation amid tight credit conditions.
Shimao's contracted sales grew by 19% to RMB169 billion in
the first eight months of 2020 from the same period a year ago,
despite the impact from the coronavirus outbreak. The growth notably
outperformed the national sales growth of 4% during the same period.
Moody's expects Shimao's leverage, as measured by revenue/adjusted
debt, will rise toward 90%-100% over the next
12-18 months from 75% for the 12 months ended June 2020,
supported by healthy revenue growth following strong contracted sales
in the past 1-2 years.
At the same time, its interest coverage, as measured by EBIT/interest,
will likely improve toward 4.5x-5.0x over the next
12-18 months from 4.1x for the 12 months ended June 2020,
driven by its revenue growth and stable profit margin.
In addition, Shimao's growing income from non-property development
businesses, including rental income from commercial buildings,
and profit from its property management business will enhance the stability
of its interest coverage. Moody's expects Shimao's
non-property development business will generate an income of around
RMB9.5 billion by 2021 from RMB6.2 billion in 2019,
driven by the scheduled completion of commercial properties such as retail
malls and fast-growing property management business.
Shimao's liquidity is good. Moody's expects the company's
cash holding, together with its cash flow from operating activities,
will be sufficient to cover its maturing debt and committed land payment
over the next 12 months. As of 30 June 2020, the company's
cash holdings of RMB69.9 billion could cover around 176%
of its maturing debt of RMB39.7 billion. Moreover,
its strong access to funding, including bank lending as well as
onshore and offshore capital markets, cushions it against any adverse
market conditions.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered Shimao's prudent approach to financial management,
which has resulted in its stable financial profile. Moody's
has also considered the concentrated ownership of the company by its key
shareholder, Mr. Hui Wing Mau, who held a total 65%
stake in the company as of 30 June 2020.
However, the company's established internal governance structures
and standards, as required under the Corporate Governance Code for
companies listed on the Hong Kong Stock Exchange, partly mitigates
the risk of such ownership concentration. In particular,
it has three independent non-executive directors (INEDs) out of
a total seven board of directors, and its board has established
three committees with specific written terms of reference to oversee particular
aspects of the company's affairs. All three committees are composed
of INEDs only.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade Shimao' ratings if it (1) sustains its sales
growth and profit margins while demonstrating strong financial discipline;
(2) maintains a strong liquidity profile, such that its cash/short-term
debt exceeds 150%; and (3) improves its credit metrics,
such that its adjusted EBIT/interest coverage rises above 4.5x-5.0x
and revenue/adjusted debt exceeds 90%-95% on a sustained
basis.
Given the positive outlook, a downgrade of Shimao's rating
is unlikely. However, Moody's could change the outlook
on the ratings to stable if the company's (1) contracted sales growth
is below expectations, (2) liquidity position weakens, (3)
aggressive land acquisitions are funded using debt; or (4) credit
metrics do not trend towards or exceed the upgrade triggers over the next
12 months.
The principal methodology used in this rating 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.
Shimao Group Holdings Limited is a Chinese property developer that was
listed on the Hong Kong Stock Exchange in July 2006. It develops
residential properties and owns a portfolio of investment properties,
including hotels. As of the end of June 2020, the company,
together with its 64%-owned Shanghai A-share listed
subsidiary, Shanghai Shimao Co., Ltd.,
held an attributable land bank of 51.9 million square meters (sqm)
in 135 cities in China. Shanghai Shimao mainly develops commercial
properties.
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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YuYing (Celine) Yang
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
