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Rating Action:

Moody's upgrades Longfor's ratings to Baa2; outlook stable

 The document has been translated in other languages

10 Sep 2020

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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

No Related Data.
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