Hong Kong, September 16, 2020 -- Moody's Investors Service has upgraded Jiangsu Zhongnan Construction
Group Co., Ltd.'s corporate family rating (CFR)
to B1 from B2 and the backed senior unsecured debt rating on the existing
notes issued by Haimen Zhongnan Investment Development (International)
Co Ltd to B2 from B3.
The outlook on the ratings is stable.
"The upgrade reflects our expectation that Jiangsu Zhongnan's credit metrics
will continue to strengthen over the next 12-18 months, supported
by increased revenue recognition from strong contracted sales and controlled
land acquisitions," says Danny Chan, a Moody's Assistant Vice
President and Analyst.
"In addition, the upgrade also reflects Jiangsu Zhongnan's
improved access to funding and reduced exposure to trust financing,"
adds Chan.
RATINGS RATIONALE
Jiangsu Zhongnan's B1 CFR reflects its strong sales execution and fast
asset turnover model, improving geographic diversification and sizable
operating scale.
On the other hand, Jiangsu Zhongnan's B1 rating is constrained by
its exposure to low-tier cities, and moderate profitability
and interest coverage, driven partly by the relatively low margins
of both the construction and property development businesses.
The rating also captures the execution risks and funding needs associated
with the company's fast growth plan, and its high exposure to joint
ventures (JVs).
Moody's expects that Jiangsu Zhongnan's debt leverage — as measured
by revenue/adjusted debt — will trend towards 100%-105%
over the next 12-18 months from 86% for the 12 months ended
June 2020, as revenue growth will outpace debt growth on the back
of strong contracted sales growth over the past two to three years.
Meanwhile, its interest coverage -- as measured by
adjusted EBIT/interest -- will improve to around 2.5x
from 2.0x over the same period. These credit metrics and
the sizable scale of its gross contracted sales — which totaled
RMB196 billion in 2019 — support its B1 corporate family rating.
With a plan to slow down its debt-funded expansion, Jiangsu
Zhongnan's contracted sales growth will likely moderate to the low teen
percentages over the next 1-2 years from a high base. For
the first eight months of 2020, the company's contracted sales
growth slowed to around 7.6% amid the COVID-19 outbreak,
following strong 34% year-on-year contracted sales
growth to RMB196 billion in 2019 and 52% year-on-year
growth to RMB146 billion in 2018.
Meanwhile, Moody's expects the company's total adjusted debt growth
will remain flat over the next 12-18 months, as it will control
its annual land purchases to within 40% of its cash received from
annual property sales.
Jiangsu Zhongnan's liquidity is good. Moody's expects its current
cash balance, together with the strong cash flow generated from
its operations, will be able to cover its short-term debt
and committed land premiums over the next 12-18 months.
As of June 2020, the company's cash balance (including restricted
cash) of RMB28.2 billion covered about 1.2x its maturing
debt of RMB23.7 billion as of the same date.
Moreover, Jiangsu Zhongnan has improved its funding channels by
issuing debut offshore senior notes in 2019. Its trust loan to
total reported debt ratio fell to 23% as of June 2020 from 29%
as of December 2019, helping control funding costs and strengthening
its financial stability.
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 Jiangsu Zhongnan'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.
In terms of governance risk, Moody's has taken into account the
company's concentrated ownership by Zhongnan Urban Construction Investment
Co., Ltd., which owned 54.4% as
of August 2020, with 61.1% of these shares pledged.
This risk is partially mitigated by: (1) the approvals and disclosures
required by the Shenzhen Stock Exchange for material related-party
transactions by listed companies; (2) the sizable available-for-sale
assets held by Zhongnan Urban Construction, which can provide alternative
liquidity to Zhongnan Urban Construction in times of need; and (3)
Jiangsu Zhongnan's consistent dividend payout policy, as reflected
by its dividend payout of 10%-25% of its net profit
in the past three years.
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 environmental, social and governance
(ESG) framework, given the substantial implications for public health
and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Jiangsu Zhongnan's stable outlook reflects Moody's expectation that
the company will control its leverage while expanding its business,
achieve modest contracted sales growth, and maintain good liquidity
over the next 12-18 months.
Moody's could upgrade the rating if Jiangsu Zhongnan improves its
financial position, for example with a higher profit margin and
lower leverage, while maintaining solid contracted sales growth.
Credit metrics that indicate a possible upgrade include (1) adjusted EBIT/interest
above 2.5x-3.0x; and (2) cash/short-term
debt above 1.25x, on a sustained basis.
A significant reduction in the contingent liabilities associated with
JVs or reduced risk of providing funding support to JVs would also be
positive for the ratings. This could result from a reduced usage
of JVs or a significant improvement in the financial strength of its JV
projects.
On the other hand, Jiangsu Zhongnan's CFR could be downgraded
if the company executes heavily debt-funded expansions or acquisitions;
suffers declines in contracted sales or revenue; or records deteriorating
liquidity on a sustained basis. Financial indicators of a possible
downgrade include interest coverage falling below 1.5x-2.0x
and cash/short-term debt falling below 1.0x, both
on a sustained basis.
Moody's could also downgrade the rating if the company's contingent
liabilities associated with JVs or the risk of providing funding support
to JVs increase significantly. This could result from a significant
deterioration in the financial strength and liquidity of its JV projects
or a substantial increase in investments in new JV projects.
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.
Jiangsu Zhongnan Construction Group Co., Ltd. is based
in China's Jiangsu Province and principally engages in property development
and construction services. The company had a total land bank of
around 44.1 million square meters as at June 2020.
Jiangsu Zhongnan was founded by Chen Jinshi, who has been engaged
in the construction business in China since 1988, when he established
the company. The company was listed on the Shenzhen Stock Exchange
in 2009 with a market capitalization of RMB35.6 billion ($5.0
billion) as of 7 September 2020.
REGULATORY DISCLOSURES
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Danny Chan
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.)
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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.
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