Moody's: Central China Real Estate's ratings unaffected by lower 1H 2016 revenue

Moody's Investor Services says that Central China Real Estate Limited (CCRE) showed a weakened level of credit metrics in 1H 2016.

But, its Ba3 corporate family and senior unsecured ratings or their stable outlook are not immediately affected.

"CCRE's revenue/debt and EBIT/interest for the 12 months ended June 2016 -- including from the company's share in joint ventures -- weakened on lower revenue recognition and increased borrowings in 1H 2016," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

"However, we expect its higher level of completed properties for delivery in 2H 2016 and its improved credit metrics over the next 12-18 months will continue to support its Ba3 corporate family rating," adds Tsang, who is also the lead analyst for CCRE.

CCRE's revenues fell 35% year-on-year to RMB2.5 billion in 1H 2016. Moody's estimates that its revenue -- including from its share of joint ventures -- was down by 19% year-on-year. Such declines were mainly due to the company's low level of delivery of completed properties in 1H 2016.

Adjusted debt -- including from its share in joint ventures -- also rose 14% to RMB19.6 billion at June 2016 from RMB17.2 billion at year-end 2015 because the company has prefunded part of its refinancing needs for 2H 2016 and its joint ventures have increased borrowings to fund their development.

As a result, leverage, as measured by revenue/debt -- including from its share in joint ventures -- fell to 72% for the 12 months to end-June 2016 from 86% in 2015.

EBIT/interest coverage -- including from its share in joint ventures -- dipped to 2.0x for the 12 months to June 2016 from 2.1x in 2015, substantially driven by the decline in revenue.

Moody's expects CCRE to complete 27 projects/phases that have a gross floor area of 1.85 million sqm, more than the 359,192 sqm completed in 1H 2016. Thus, it will recognize a higher level of revenue in 2H 2016 when compared with 1H 2016.

Moreover, its strong contracted sales of RMB10.7 billion (+58% year-on-year) and increased average selling price in the first seven months of 2016 will likely support revenue growth and profit margins in the next 12-18 months.

Moody's notes that the company's plan to increase management fee and recurring income through its light-asset model will enhance income stability and margin. However, the contribution will remain small in the next 12-18 months.

Moody's expects revenue/debt -- including from its share in joint ventures -- will improve to around 80% in the next 12-18 months, while EBIT/interest -- including from its share in joint ventures -- will improve to around 2.5x-3.0x. Such credit metrics will support the company's Ba3 corporate family rating.

CCRE's liquidity is adequate, as supported by its strong contracted sales. It had a cash balance of RMB10.9 billion as of June 2015. Adjusted cash/short-term debt -- including amounts due to and from its joint ventures -- improved to 1.7x at end-June 2016 from 1.5x at end-2015.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Central China Real Estate Limited is a leading property developer in Henan Province. Founded in 1992, it listed on the Hong Kong Stock Exchange in June 2008.