Hong Kong, September 10, 2020 -- Moody's Investors Service has upgraded Longfor Group Holdings Limited's
issuer and senior unsecured ratings to Baa2 from Baa3.
The outlook has been revised to stable from positive.
"The upgrade reflects Longfor's demonstrated ability to maintain
a strong operating and financial performance throughout the cycles,"
says Kaven Tsang, a Moody's Senior Vice President.
"It also reflects the company's disciplined and prudent financial
management while pursuing growth over the past decade and its growing
recurring rental income, which will strengthen its cash flow stability
and solidify its position at the Baa2 rating level," adds
Tsang.
RATINGS RATIONALE
Longfor's Baa2 issuer rating reflects the company's strong brand
name, good geographic diversification, good liquidity and
track record of resilient sales growth through the cycles. The
company has a balanced land bank across major regions in China (A1 stable),
which can support business growth over the next three to four years.
At the same time, Longfor's strategy of growing its residential
developments and property investments exposes the company to industry
cyclicality and execution risks, in addition to increasing its funding
needs. However, the company's prudent approach to financial
management and good access to bank lending and the capital markets with
relatively low funding cost will provide it with a buffer against stress
during a market downturn.
Longfor's financial metrics are strong when compared with most of
its rated Chinese property peers. Moody's expects the company's
revenue/adjusted debt and EBIT/interest will improve to around 100%
and 7.0x-7.5x over the next 12-18 months from
97% and 6.9x respectively for the 12 months ended June 2020.
The improvements will be driven by a growth in revenue thanks to the company's
strong contracted sales over the past 2-3 years, and the
company's disciplined approach to pursuing growth and controlling
debt increase.
The company's growing recurring rental income will also enhance
the company's cash flow stability and improve its debt-servicing
ability. Moody's expects Longfor's rental income/interest
coverage will strengthen to about 115% over the next 12-18
months from 89% for the 12 months ended June 2020, driven
by new additions of shopping malls and organic growth.
Longfor's liquidity position is excellent, underpinned by its strong
operating cash flow and good funding access to both onshore and offshore
capital markets. Moody's expects the company's cash holdings
along with its operating cash flow, could cover its short-term
debt and committed land payments over the next 12-18 months.
Supported by an ample amount of cash holdings, the company's
cash/short-term debt edged up to 4.6x as of June 2020 from
4.4x at the end of 2019 and 3.9x at the end of 2018.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered Longfor's concentrated ownership by its key
shareholder, Mdm Cai, the daughter of the chairwoman who held
a total 43.96% stake in the company as of 31 August 2020.
Such risk is partly mitigated by the presence of an established management
team and four independent nonexecutive directors on its eight-member
board of directors, and by other internal governance structures
and disclosure standards as required under the Corporate Governance Code
for companies listed on the Hong Kong Stock Exchange.
Additionally, the upgrade reflects the company's track record
of maintaining prudent financial management with a stable net debt/equity
of 50%-55%, which has been within the company's
target over the last four years.
Moody's regards the impact of the deteriorating global economic
outlook because of the rapid and widening spread of the coronavirus pandemic
as a social risk under its ESG framework, given the substantial
implications for public health and safety.
Longfor's issuer and senior unsecured ratings are not affected by subordination
to claims at the operating company level. This is because,
despite its status as a holding company with a majority of claims in the
operating subsidiaries, creditors of Longfor benefit from the group's
diversified business profile, with cash flow generation across a
large number of operating subsidiaries and different business segments
in property development, retail mall and apartment leasing.
Such business diversification mitigates the structural subordination risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Longfor's financial
metrics will be sustained at levels appropriate for its Baa2 issuer rating
over the next 12-18 months.
Upward rating pressure could emerge if Longfor maintains its strong operating
profile, liquidity and disciplined financial management, develops
stronger institutional corporate governance frameworks and standards that
resemble companies with diversified ownership and demonstrates abilities
to withstand risk of changes in ownership or key personnel.
Credit metrics indicative of an upgrade include (1) revenue/adjusted debt
above 110%-115%, (2) EBIT/interest over 7.5x-8.0x,
and (3) recurring rental income/interest coverage above 115%-120%.
However, the rating could be downgraded if the company records (1)
a significant deterioration in sales or liquidity; (2) a more aggressive
debt-funded expansion that weakens its credit metrics, such
that revenue/adjusted debt drops under 85%-90%,
EBIT/interest falls below 5.5x-6.0x on a sustained
basis or recurring rental income/interest coverage falling below 90%-95%.
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.
Longfor Group Holdings Limited (Longfor) is a leading developer in China's
residential and commercial property development sector. Founded
in 1993, the company began its business in Chongqing and has established
a solid brand name in the Chongqing municipality. As of June 2020,
Longfor had a total land bank of 73.5 million square meters (sqm)
in gross floor area (GFA), spanning 58 cities in five major economic
regions in China.
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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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
Kaven Tsang
Senior Vice President
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
