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Rating Action:

Moody's revises outlook on China South City's ratings to negative

 The document has been translated in other languages

01 Dec 2015

Hong Kong, December 01, 2015 -- Moody's Investors Service, ("Moody's") has revised to negative from stable the outlook on China South City Holdings Limited's (CSC) B1 corporate family rating and B2 senior unsecured debt rating. Moody's has also affirmed all the ratings of CSC.

RATINGS RATIONALE

"The change in ratings outlook to negative from stable reflects our expectation that CSC's credit metrics will stay weak as its contracted sales and revenue recognition visibility will remain low in the next 12 to 18 months," says Stephanie Lau, a Moody's Assistant Vice President and Analyst.

On 27 November 2015, CSC reported a year-on-year decline of 58.1% in revenue to HKD2.15 billion and 44% decline in contracted sales to HKD3.80 billion for the first half of the financial year ending March 2016 (1H FY March 2016).

The company's weak performance came from the slower economic growth in China (Aa3 stable), lower infrastructure spending by the local government, and the weaker investment sentiment of investors.

Moody's believes that CSC will likely deliver weak contracted sales in the next 12--18 months because the slow Chinese economy is likely to persist.

In light of the challenging market conditions, CSC's strategy is to conserve liquidity, which includes reducing capital expenditure and increasing low-cost borrowing.

As such, Moody's believes that the company's debt level is unlikely to fall and may even increase modestly. This implies that the company's credit metrics could be weaker than the levels reported in 1H FY March 2016.

As a result of weaker revenue recognition in 1H FY March 2016, CSC's EBIT/interest coverage dropped to 1.9x on a last twelve months basis compared with 3.0x at FYE03/2015. Such a low level could pressure its ratings.

On the other hand, Moody's has noted that CSC's non-development recurring revenue in 1H FY March 2016 recorded a 63% year-on-year rise to HKD603 million, which provided interest coverage of around 63%.

Additionally, CSC's liquidity position has not deteriorated. Its cash/short-term debt improved slightly to 95% at end-September 2015 after issuance of corporate bonds in 2015, compared to 91% at end-March 2015.

CSC's B1 corporate family rating reflects its unique business model, which involves the development and operation of integrated logistics and trade centers in China.

The rating also considers CSC's ability to access large suburban land plots at a low cost, as well as the infrastructure support it receives from local governments.

Its relatively low land costs have helped the company achieve high gross margins that offer flexibility in pricing in a down cycle.

Nevertheless, CSC's rating is constrained by execution risks related to its expansion into new locations. Its fast and large-scale expansion will entail significant funding needs.

Moreover, CSC is developing a stream of non-development recurring income from its logistics and trade centers that can significantly contribute to debt servicing.

The rating outlook could return to stable if CSC improves (1) its contracted sales; and (2) its revenue and profitability such that its EBIT/interest coverage level trend towards 2.0x-2.5x and non-development recurring revenue/gross interest ratio stays at 0.7-0.8x.

On the other hand, downgrade pressure on CSC's ratings could arise if the company (1) experiences contracted sales deterioration from the level recorded in 1H FY March 2016, which is unlikely to reverse in the near term; (2) increases its level of unsold inventory; (3) shows weakening in its liquidity position; or (4) shows deterioration in its credit metrics, that is, EBIT/interest falling below 2.0x-2.5x, and non-development recurring revenue/gross interest ratio below 0.7-0.8x.

The ratios above are calculated based on Moody's standard adjustments and the definition stated in Moody's Homebuilding And Property Development Industry. The interest coverage formula is modified for Chinese developers and substitutes "capitalized interest" in the numerator for "interest charged to cost of goods sold". This is because the latter is not separately disclosed in audited financial statements. Total debt does not include adjustments for mortgage guarantees.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

China South City Holdings Limited, listed on the Hong Kong Stock Exchange, is a developer and operator of large-scale integrated logistics and trade centers in China. The company operates one center in Shenzhen and is developing new trade centers in Nanning, Nanchang, Xian, Harbin, Zhengzhou, Hefei and Chongqing.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Stephanie Lau
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's revises outlook on China South City's ratings to negative
No Related Data.
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