Rating Action: Moody's assigns B2 CFR to CSC; outlook stable
Global Credit Research - 27 Aug 2020
Hong Kong, August 27, 2020 -- Moody's Investors Service has assigned a B2 corporate family rating (CFR) to China South City Holdings Limited (CSC).
The outlook on the rating is stable.
"CSC's B2 CFR reflects its experience in developing and operating integrated logistics and trade centers in China, its good profitability, growing operations and recurring income," says Danny Chan, a Moody's Assistant Vice President and Analyst.
"However, the CFR is constrained by (1) its moderate operating scale and geographic concentration, which could increase volatility; (2) its weak credit metrics, given its use of debt to fund expansion; and (3) its weak liquidity," adds Chan, who is also the lead analyst for CSC.
CSC is a leading logistics and trade centers developer and operator in China with more than 18 years of operating history. The company has expanded its development portfolio to include residential and condominium projects mostly in areas surrounding its trade centers. These residential and condominium projects contributed around 80% of CSC's total contracted sales in the fiscal year ending March 2020 (fiscal 2020), which helped reduce cash flow volatility from the cyclical demand for its trade centers.
Moody's expects that CSC's contracted sales will increase by 10% in fiscal 2021 to around HKD15 billion from the previous year, supported by its sizeable salable resources and the strong sales performance of residential properties and condominium projects. In fiscal 2020, CSC's gross contracted sales fell 7.9% to HKD13.5 billion compared with a year ago, mainly because of the adverse impact of the coronavirus outbreak.
Moody's also expects the company to maintain its good profitability in the next 12--18 months, underpinned by low land costs and the good profitability of its rental income and ancillary services. CSC has achieved high gross margins of above 40% in the past 2-3 years, which exceeds the industry average and offers flexibility in pricing during any down cycle.
The rating also considers CSC's growing streams of non-development income from its rental, property management, logistics and warehousing services and outlets businesses, many of which are secured by long-term contracts with clients. These recurring streams of income can moderate the volatility of cash flow from the sales of property development projects.
On the other hand, the B2 rating is constrained by CSC's moderate operating scale and geographic concentration, while the limited number of development projects could raise sales and cash flow volatilities.
The company has some concentration risk. Its property development revenue of HKD7.5 billion in fiscal 2020 was generated from only eight projects. Furthermore, Moody's estimates that more than 60% of its saleable land banks are mainly from two projects in Zhengzhou and Xi'an. Any adverse changes in the economies and housing markets of these two cities could materially affect the company's cash flow.
CSC's financial metrics are modest as it has funded its growth with debt. Moody's expects its revenue/adjusted debt will improve mildly to around 30%-35% in next 12-18 months from around 29% in fiscal 2020, while its adjusted EBIT/interest will strengthen to 2.0x-2.1x over the same period from 1.9x in fiscal 2020, supported by growth in revenue and EBIT. These projected metrics are modest for the company's CFR.
CSC's liquidity is weak, given its sizable refinancing needs in the next 12-18 months. As of March 2020, it had HKD10.3 billion of cash balances, compared to HKD14.9 billion of reported short-term debt, including HKD6.7 billion of bond maturities, and HKD8.2 billion of bank loans and other borrowings.
Moody's expects the company will have to raise new debt to refinance its maturing debt. The company's established access to offshore debt capital markets and its sizable portfolio of unpledged investment properties will provide the company with flexibility in raising new borrowings.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership, with its substantial shareholders, Cheng Chung Hing and his family, holding a 35.77% stake in the company as of June 2020.
Moody's also considers the following: (1) 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 Stock 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 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 outlook reflects Moody's expectation that CSC (1) can refinance its maturing debt and preserve adequate liquidity; (2) will adopt a disciplined approach to expansion, and (3) will maintain its stable source of recurring income.
Moody's could upgrade CSC's rating if the company (1) expands its scale and non-development recurring revenue; (2) strengthens its financial profile; and (3) improves its liquidity.
Credit metrics that could trigger an upgrade include (1) EBIT/interest above 2.5x--3.0x; and (2) revenue/adjusted debt above 50%-60%.
However, Moody's could downgrade the rating if (1) CSC's sales or rental income significantly declines; (2) the company materially increases its debt-funded investment projects; or (3) its liquidity worsens because of difficulty in refinancing its maturing debt over the next six to 12 months.
Financial metrics indicative of a downgrade include EBIT/interest below 1.0x--1.5x. Any sign of weakened access to funding will also pressure the rating.
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.
CSC is a developer and operator of large-scale integrated logistics and trade centers in China. The company, which listed on the Hong Kong Stock Exchange in 2009, also develops supporting residential properties and commercial facilities surrounding its trade centers, and provides various value-added services to occupants of its trade centers and other facilities.
As of June 2020, CSC operates eight centers in Shenzhen, Nanning, Nanchang, Xian, Harbin, Zhengzhou, Hefei and Chongqing.
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 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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