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Rating Action: Moody's affirms Fineland's B2 CFR, outlook stable
Global Credit Research - 23 Dec 2020
Hong Kong, December 23, 2020 -- Moody's Investors Service has today affirmed Guangzhou Fineland Real Estate Development Co., Ltd.'s B2 corporate family rating (CFR) and B3 senior unsecured rating.
The outlook remains stable.
"The ratings affirmation reflects our expectation that Fineland will achieve decent contracted sales growth over the next 1-2 years thanks to its well-located land bank in the Greater Bay Area, and the growing contribution from urban redevelopment projects," says Danny Chan, a Moody's Assistant Vice President.
"We also expect Fineland will maintain stable credit metrics and adequate liquidity over the next 1-2 years," adds Chan.
RATINGS RATIONALE
Fineland's B2 CFR reflects (1) the company's long operating history and established brand in its core market of Guangdong province, where there is good demand for residential properties, (2) its adequate liquidity to cover near-term refinancing needs and its ability to foster relationships with domestic banks to support its property development business.
On the other hand, the CFR is constrained by the company's (1) small scale, (2) geographic concentration in Guangdong province and high exposure to lower-tier cities, and (3) modest credit metrics and ongoing funding needs to support its business growth over the next 1-2 years.
Moody's expects Fineland's debt leverage ratio, as measured by revenue to debt, will recover slightly to around 50% in the coming 12-18 months from 45% for the 12 months ended June 2020, as revenue more than offset an increase in debt to fund its business expansion.
Meanwhile, Fineland's EBIT/interest will stay around 2.0x in the next 12-18 months, similar to the 2.0x for the 12 months ended June 2020, on the back of a likely mild decline in gross margins during the same period.
Fineland's gross margin will fall slightly to around 31% in the next 1-2 years from 34% for the 12 months ended June 2020 because of the cap on the selling prices of new housing and increased land costs in some of its major markets. Nevertheless, Fineland's margin remains robust relative to its single-B rated Chinese property peers, thanks to the contribution of high-margin urban redevelopment projects.
The growing contribution from its urban redevelopment projects and robust housing demand in Fineland's core markets in Guangdong Province will also support the company's contracted sales growth in the next 12-18 months.
Moody's expects the company's gross contracted sales to grow to RMB20 billion in 2021 from an estimated RMB17 billion in 2020 and RMB12 billion in 2019. This sales growth will support Fineland's revenue growth and cash flow generation over the next 12-18 months.
Fineland's liquidity is adequate. Although the company's cash to short-term debt coverage dropped to 93% as of 30 June 2020 from 117% at year-end 2019, Moody's expects that the company's cash holdings, together with its operating cash flow after deducting basic cash flow items, will be sufficient to cover its maturing debt, committed land payments and dividend payments over the next 12-18 months.
Fineland's B2 CFR takes into account its private company status. Comparatively, its information disclosure and corporate governance are less transparent than that of listed property developers.
The company is also exposed to the risk associated with its concentrated ownership and related party transactions because the chairman owns 100% of the company. However, there have been limited related party transactions relative to its scale over the past 3 years. The chairman has also demonstrated his ability to manage the company through the industry cycles for the last two decades.
The B3 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk. The majority of Fineland's claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Fineland's stable outlook reflects Moody's expectation that the company will execute its business expansion plan while maintaining adequate liquidity and stable credit metrics over the next 12-18 months.
Moody's could upgrade the ratings if Fineland (1) executes its business plan to grow its scale; (2) strengthens its financial profile; and (3) maintains sufficient liquidity.
Financial ratios indicative of an upgrade include revenue/adjusted debt above 70%-75%, EBIT/interest above 3.0x and cash/short-term debt above 1.5x on a sustained basis.
Conversely, Moody's could downgrade the ratings if (1) Fineland's contracted sales weaken as a result of weak execution or a delay in the conversion of urban redevelopment projects; (2) it accelerates its land acquisitions such that its financial metrics and liquidity weaken, or (3) it encounters high near-term refinancing needs.
Financial metrics indicative of a downgrade include (1) EBIT/interest falling below 1.5x-2.0x; or (2) cash/short-term debt dropping below 1.0x on a sustained basis.
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.
Founded in 1995, Guangzhou Fineland Real Estate Development Co., Ltd. is a property developer based in Guangdong Province targeting mid to high-end customers. The company adopts Eastern-style design within its development to cater for different customers. At the end of June 2020, the company was wholly owned by Fang Ming, who is also the founder and chairman of the company.
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_1243406.
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.
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.) 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
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