Hong Kong, September 15, 2022 — Moody’s Investors Service has downgraded CIFI Holdings (Group) Co. Ltd.’s corporate family rating (CFR) to B1 from Ba3 and senior unsecured rating to B2 from B1.
At the same time, Moody’s has changed the rating outlook to negative from ratings under review.
This concludes the review for downgrade initiated on 22 July 2022.
“The rating downgrade reflects CIFI’s weakened credit profile, driven by its declining property sales and reduced financial flexibility amid the difficult operating and funding conditions in China’s property sector,” says Cedric Lai, a Moody’s Vice President and Senior Analyst.
These negative developments no longer support the company’s previous Ba3 CFR.
“The negative outlook reflects a likely weakening of CIFI’s liquidity buffer, given its reduced ability to raise sizable unsecured long-term funding,” adds Lai.
RATINGS RATIONALE
Moody’s expects CIFI’s operating performance to remain weak over the next 12-18 months amid difficult operating conditions. Specifically, Moody’s forecasts the company’s contracted sales will decline to around RMB160 billion in 2022 and RMB140 billion in 2023, from around RMB247 billion in 2021. Its contracted sales significantly decreased by 47% during the first eight months in 2022 to RMB94.3 billion compared with the same period in 2021, driven in part by pandemic-led disruptions during the period.
CIFI raised funds in September 2022 to support its liquidity, completing a share placement of HKD623 million and a project sale of HKD1.3 billion in Hong Kong SAR, China (Aa3 stable). Consequently, Moody’s expects CIFI to maintain adequate liquidity over the next 12-18 months, although its liquidity buffer will likely decrease over the same period as it will repay some of the maturing debt using its internal cash source. Its unrestricted cash balance reduced to RMB31.1 billion as of the end of June 2022 from RMB46.5 billion as of the end of 2021, due to its weakened sales and repayment of some maturing debt.
CIFI will likely continue to boost contracted sales amid the difficult market conditions, as well as offer price discounts to support sales, which will in turn pressure its profit margins.
Consequently, Moody’s expects CIFI’s credit metrics to deteriorate. Specifically, its EBIT/interest coverage will fall to 2.5x-2.6x from 3.6x for the 12 months ended June 2022, and its debt leverage, as measured by revenue/adjusted debt, will reduce to around 65% over the next 12-18 months from 78% for the 12 months ended June 2022, because of an expected decrease in profit margins and revenue over the same period.
CIFI’s B1 CFR reflects the company’s ability to execute its property development strategy, which is focused on catering to mass-market housing demand in key tier 1 and tier 2 cities. This focus has helped the company achieve a rapid asset turnover in the past. The rating also considers the company’s diversified geographic coverage and its adequate, albeit weakening, liquidity buffers.
On the other hand, CIFI’s credit profile is constrained by the company’s weak operating performance, deteriorating credit metrics and material exposure to its joint venture (JV) businesses, which hinders the transparency of its credit metrics, although this is mitigated by the good reputation of its JV partners.
The B2 senior unsecured debt rating is one notch lower than the CFR due to structural subordination risk. The majority of CIFI’s claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation 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.
In terms of environmental, social and governance (ESG) factors, Moody’s has considered CIFI’s concentrated ownership. Its controlling shareholders, Lin Zhong and his family members, collectively held a 53.2% stake in the company as of 31 August 2022. Moody’s has also considered (1) the independent non-executive directors on the company’s audit and remuneration committees, who maintain oversight of the company; (2) the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong to oversee related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody’s could revise CIFI’s rating outlook to stable if the company improves its sales and financial metrics, strengthens its access to long-term funding, and maintains sufficient liquidity.
Moody’s could downgrade CIFI’s ratings if its liquidity or access to funding deteriorates; its contracted sales decline more than Moody’s expectation, such that its credit metrics weaken, with its EBIT/interest coverage falling below 2.5x or its unrestricted cash/short term debt below 1.0x, both on a sustained basis.
Downward pressure could also increase if CIFI’s contingent liabilities associated with its JVs or the likelihood of CIFI providing funding support to the JVs increases significantly.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
CIFI Holdings (Group) Co. Ltd. (CIFI) was founded in 2000 and incorporated in the Cayman Islands in May 2011. It listed on the Hong Kong Stock Exchange in November 2012. As of 31 August 2022, it was 53.2% owned by the Lin family.
REGULATORY DISCLOSURES
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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.
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
