Rating Action: Moody's revises Powerlong's outlook to positive
Global Credit Research - 31 Aug 2020
Hong Kong, August 31, 2020 -- Moody's Investors Service has revised to positive from stable the rating outlook of Powerlong Real Estate Holdings Limited.
At the same time, Moody's has affirmed Powerlong's B1 corporate family rating and its B2 senior unsecured debt ratings.
"The change in outlook to positive reflects our expectation that Powerlong's credit metrics will improve over the next 12-18 months, driven by strong revenue recognition as well as good profit margins," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"We also expect Powerlong's growing investment property portfolio will strengthen its recurring rental income, in turn supporting its cash flow stability and profitability", adds Lai.
Powerlong's total contracted sales grew 11.3% to RMB39.0 billion in the first seven months of 2020 compared with last year despite disruptions from the coronavirus outbreak, after robust 47% year-on-year growth to RMB60.4 billion for the full year 2019. Moody's expects its contracted sales will increase in 2020 to around RMB70 billion when compared with 2019, supported by good sales execution abilities and its focus on the economically strong Yangtze River Delta region with robust housing demand.
Such contracted sales growth will help fund the company's business expansion and will support revenue growth and liquidity over the next 12-18 months.
Moody's further estimates that the company's gross profit margin will remain around 34% over the coming 12-18 months because of its low-cost land bank. Its low land costs provide the company with pricing flexibility.
Consequently, Moody's expects Powerlong's debt leverage -- as measured by revenue/adjusted debt - will improve to 55%-65% over the next 12-18 months from around 50% for the 12 months ended June 2019. Similarly, Moody's expects adjusted EBIT/interest will remain strong at 3.0x-3.4x from about 2.9x over the same period.
Moody's expects that Powerlong's rental income will grow 25% annually to around RMB2.1 billion over the next 12-18 months from RMB1.9 billion in 2019, underpinned by the scheduled opening of its new retail malls. The company plans to open ten retail malls in the second half of 2020, and a further 13 malls in 2021. This will support its rental income growth and strengthen its capability to service interest payments.
Powerlong's B1 corporate family rating (CFR) reflects its (1) track record of developing and selling commercial and residential properties; (2) growing recurring revenue, which improves the stability of its debt servicing; and (3) expansion into cities with strong economic fundamentals where demand for its properties is more favorable. However, the company's credit profile is constrained by the execution risk related to its business expansion, the high capital needs associated with its business strategy and its moderate debt leverage.
The B2 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over Powerlong'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.
Powerlong's liquidity is good. Its cash holdings of RMB26.4 billion as of 30 June 2020 could fully cover its short-term debt of RMB22.9 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 in its controlling shareholder, Hoi Kin Hong and Hoi Wa Fong, who held a 59% stake in the company as of 30 June 2020.
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 ESG framework, because of the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if Powerlong continues to grow in scale while maintaining its adequate liquidity and sound credit metrics, and improves its debt leverage to a level that matches its business model of holding investment properties. Credit metrics that could trigger a ratings upgrade include: (1) adjusted EBIT/interest rising above 3.0x; and (2) revenue/adjusted debt in excess of 60%-65%.
A rating downgrade is unlikely, given the positive outlook. However, Moody's could revise Powerlong's outlook to stable if the company's sales weaken or if it pursues a more aggressive expansion strategy that weakens its credit metrics. Credit metrics that could trigger a ratings downgrade include: (1) adjusted EBIT/interest falling below 2.5x; (2) revenue/adjusted debt failing to trend toward 55%..
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.
Powerlong Real Estate Holdings Limited is a Chinese property developer focused on building large-scale integrated residential and commercial properties in China. The company listed on the Hong Kong Exchange in October 2009. The founding Hoi family held a 59% stake in the company at 30 June 2020.
At 30 June 2020, Powerlong's land bank for development totaled around 28.6 million square meters in gross floor area under development and for future development.
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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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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