Rating Action: Moody's assigns B2 to Zhenro Properties' proposed USD notes
Global Credit Research - 03 Sep 2020
Hong Kong, September 03, 2020 -- Moody's Investors Service has assigned a B2 rating to Zhenro Properties Group Limited's (B1 stable) proposed senior unsecured USD notes.
Zhenro plans to use the proceeds from the proposed notes to refinance existing debt.
RATINGS RATIONALE
"Zhenro's B1 corporate family rating (CFR) reflects the company's (1) quality and geographically diversified land bank, which helps the company manage property market volatility and regulatory risks; (2) ability to generate strong contracted sales growth; and (3) good liquidity and improved access to funding, especially in the debt capital markets," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"However, the company's credit profile is constrained by its improving but still-moderate financial metrics as a result of its moderate debt leverage," adds Lai.
The proposed issuance will improve Zhenro's liquidity profile and will not materially affect its credit metrics, because the company will use the proceeds to refinance existing debt.
Moody's expects Zhenro's revenue/adjusted debt and adjusted EBIT/interest, excluding adjustments for its joint-ventures and associates, will improve to around 50%-55% and around 2.0x, respectively, over the next 12-18 months from 46% and 1.7x for the 12 months ended June 2020, underpinned by increased revenue recognition from strong contracted sales over the past two years.
Zhenro's total contracted sales grew 1.3% to RMB69.6 billion in the first seven months of 2020 compared with last year despite the impact from the coronavirus outbreak. Moody's expects its contracted sales will slightly increase in 2020 when compared with 2019, supported by its strong sales execution abilities, good-quality land bank and sizable salable resources in upper tier cities.
The B2 senior unsecured debt rating is one notch lower than the CFR due to structural subordination risk. This risk reflects the fact that the majority of Zhenro's claims are at its operating subsidiaries and have priority over claims at the holding company in a bankruptcy 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.
Zhenro's liquidity is good. Its cash holdings of RMB39.8 billion as of 30 June 2020 could cover its short-term debt of around RMB19 billion. Moody's expects the company's cash holdings, together with expected operating cash inflow, will be able to cover its committed land purchases, dividend payments, as well as capital spending and payables for its previous acquisitions, over the next 12-18 months.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership by the owner family, which held a 64.56% stake in the company as of 31 December 2019.
Moody's has also considered (1) the fact that independent directors chair the audit and remuneration committees; (2) the low level of related-party transactions and dividend payouts; and (3) the presence of other internal governance structures and standards as required by the Hong Kong Exchange.
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 because of the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable rating outlook reflects Moody's expectation that Zhenro will be able to execute its sales plan and remain prudent in its financial management, such as by maintaining sufficient liquidity over the next 12-18 months.
Moody's could upgrade Zhenro's ratings if the company (1) demonstrates sustained growth in its contracted sales and revenue through the economic cycles without sacrificing its profitability; (2) remains prudent in its land acquisitions and financial management; (3) improves its credit metrics, such that EBIT/interest registers at least 3.0x and revenue/adjusted debt rises to at least 75%-80% on a sustained basis; and (4) maintains adequate liquidity.
On the other hand, Moody's could downgrade the ratings if Zhenro: (1) generates weak contracted sales; (2) suffers from a material decline in its profit margins; (3) experiences an impairment of its liquidity position, such that cash/short-term debt falls below 1.0x; and/or (4) materially increases its debt leverage.
Credit metrics indicative of a downgrade include EBIT/interest coverage falling below 2.0x and/or adjusted revenue/debt falling below 50%-55% on a sustained basis.
The principal methodology used in this rating 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.
Zhenro Properties Group Limited was incorporated in the Cayman Islands in 2014 and listed on the Hong Kong Stock Exchange in January 2018. At 30 June 2020, Zhenro had 198 projects in 32 cities across China. Its key operating cities include Shanghai, Nanjing, Fuzhou, Suzhou, Tianjin and Nanchang.
The company was founded by Mr. Ou Zongrong, who indirectly owned 54.6% of Zhenro Properties as of 31 December 2019. Mr. Ou Guowei and Mr. Ou Guoqiang, the sons of Ou Zongrong, together owned 9.96% of the company as of the same date.
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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is 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.
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.
Cedric Lai Vice President - Senior 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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