China Aoyuan Group Limited -- Moody's changes China Aoyuan's outlook to stable from positive; affirms ratings

Rating Action: Moody's changes China Aoyuan's outlook to stable from positive; affirms ratingsGlobal Credit Research - 19 Apr 2021Hong Kong, April 19, 2021 -- Moody's Investors Service has changed the rating outlook on China Aoyuan Group Limited to stable from positive.At the same time, Moody's has affirmed China Aoyuan's B1 corporate family rating (CFR) and B2 senior unsecured rating."The change in outlook to stable from positive reflects China Aoyuan's weaker-than-expected 2020 financial metrics and our expectation that the company's slowly improving credit metrics will be more consistent with a B1 CFR over the next 12-18 months," says Celine Yang, a Moody's Assistant Vice President and Analyst.Specifically, China Aoyuan's debt leverage remains high. Its adjusted debt increased 35% to RMB140 billion as of end of 2020, significantly higher than our previous expectation. However, Moody's expects the company to gradually reduce debt in 2021 and 2022."The rating affirmation reflects our expectation that the company will maintain good liquidity and access to onshore and offshore funding channels, while achieving stable growth in contracted sales and revenue over the next 12-18 months," adds Yang.RATINGS RATIONALEChina Aoyuan's B1 CFR continues to reflect its (1) strong execution capability even during previous down cycles; (2) established brand in the economically strong Guangdong Province; and (3) good access to onshore and offshore funding.On the other hand, the B1 CFR is constrained by China Aoyuan's high debt leverage, and modest debt capital structure, given its relatively large short-term debt, at 46% of its total reported debt as of the end of 2020.Moody's forecasts China Aoyuan's debt leverage - as measured by revenue/adjusted debt - will continue to improve to 60%-66% over the next 12-18 months from 48% in 2020. This will be driven by the company's gradual debt reduction and improved revenue recognition from strong contracted sales growth over the past one to two years. Similarly, China Aoyuan's adjusted EBIT/interest coverage will improve to about 2.5x-2.8x over the same period from 2.3x in 2020. These key credit metrics are appropriate for its B1 CFR when compared with rated peers.China Aoyuan has rapidly grown its minority interest and provided guarantees to joint ventures (JV) and associates as a result of its increased partnership for its development projects, including its urban redevelopment businesses. Such a strategy could add uncertainty to its control over project cash flow and weaken the transparency of its contingent liabilities.Moody's also expects the company to prudently pursue growth and use internal resources to reduce debt over the next one to two years. As a result, its total adjusted debt will likely decrease slightly to RMB130 billion-RMB 135 billion over the coming 12-18 months from RMB140 billion as of December 2020.The company's 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 claims are at the operating subsidiaries and have priority over China Aoyuan'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.China Aoyuan's liquidity position is good. The company's cash balance of RMB70.0 billion as of the end of 2020 covers 134% of its short-term debt. Such cash holdings, together with the company's operating cash flow, will be sufficient to cover its short-term debt and estimated committed land payments over the next 12-18 months.With respect to governance risk, China Aoyuan's B1 CFR incorporates the company's concentrated ownership by its key shareholders, Guo Zi Wen and Guo Zi Ning, who held a total 55.2% stake in the company as of 29 March 2021. Moody's has considered the presence of internal governance structures and disclosure standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. The company has three special committees, namely an audit committee, remuneration committee and nomination committee. All these committees are either chaired or dominated by independent nonexecutive directors and exercise supervision over the company. In addition, the company has a stable dividend policy, with a dividend payout of around 35%-40% of its net profit for the year attributable to owners of the company over the past three years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade China Aoyuan rating if the company (1) sustainably grows its contracted sales and revenue through the cycles without sacrificing its profitability; (2) maintains a prudent approach to its land acquisitions and financial management; (3) improves its credit metrics, such that its EBIT/interest registers 2.5x-3.0x and revenue/adjusted debt improves to 70%-75% on a sustained basis; and (4) maintains good liquidity, such that its cash on hand consistently covers its short-term debt and there is sufficient capacity under its maintenance covenants for bank loans.China Aoyuan's rating could be downgraded if growth in its contracted sales deteriorates, or if the company's credit metrics weaken, such that its (1) EBIT interest coverage falls below 2.0x; (2) revenue/adjusted debt fails to trend towards 60%; or (3) liquidity weakens, with its cash holdings slipping below 1.0x of short-term debt.Any signs of weakening liquidity or access to funding would also be negative for the company's rating.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.China Aoyuan Group Limited is one of the leading property developers in China focusing on the development of mass-market properties. In March 2019, China Aoyuan spun off its property management arm, Aoyuan Healthy Life Group Company Limited. (Aoyuan Healthy Life), which was listed on Hong Kong Stock Exchange.As of 31 December 2020, the company had property projects in China, Australia, Canada, Hong Kong and Macao, with a total land bank of about 57.2 million square meters in gross floor area, which can cover around three years of property development.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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