B1

Published on May 15 2019

Moody's Investors Service has assigned a first-time B1 corporate family rating (CFR) to Kaisa Group Holdings Ltd. The outlook is stable.

Reflects the company's strong brand and sales execution in the Guangdong-Hong Kong-Macao Bay Area, established track record with higher-margin urban redevelopment projects, and good quality land banks in high-tier cities, such as Shenzhen.

However, the company's rating is constrained by its moderate financial metrics, history of debt restructuring and shares suspension, and high financial costs,

Moody's expects that Kaisa's attributable contracted sales will continue to grow by 18% to around RMB83 billion in 2019 from RMB70 billion in 2018, and increase further by 35% to around RMB112 billion in 2020, in view of its sizable saleable resources, including the continued conversion of urban redevelopment projects in higher-tier cities. This scale is large when compared with many of its B1-rated Chinese property peers.

Kaisa's urban redevelopment projects support the company's higher gross margins, because of the lower land acquisition costs associated with this type of projects relative to the cost of acquiring lands from public auctions in Shenzhen.

Moody's estimates that the company's gross profit margins will increase to 31%-32% in the coming 12-18 months compared with 29% in 2018, because of the increased contribution from urban redevelopment projects.

At 31 December 2018, the company's total saleable resources comprised a gross floor area of around 24 million square meters across 45 cities. Of the 24 million square meters, more than seven million were from urban redevelopment projects; accounting for 30% of Kaisa's total land bank by gross floor area. In excess of 3.2 million square meters were located in Shenzhen, accounting for 35% of the total land bank by sales value.

Moody's estimates that Kaisa's land bank can support its property development business for the next 4-5 years, based on its contracted sales in 2018.

Kaisa's rating is constrained by its high debt leverage. Moody's expects Kaisa's revenue to maintain strong growth supported by its robust contracted sales. As a result, its revenue/adjusted debt will rise to around 51% and 63% in 2019 and 2020, from 36% in 2018.

Likewise, its adjusted EBIT/interest coverage should improve to 2.1x in 2019 and 2.5x in 2020 from 1.7x in 2018. These credit metrics and the scale of its attributable contracted sales — which totaled RMB70 billion in 2018 — position the company's CFR at the B1 rating level.

Kaisa's B1 rating has factored in its history of debt restructuring and shares suspension, as well as high funding cost.

The company's trust loan financing and other onshore borrowings totaled RMB23.5 billion at 31 December 2018, representing 20% of its total borrowings at 31 December 2018, which resulted in a higher average funding cost of approximately 8.4% in 2018. Moody's expects that Kaisa will expand its offshore borrowings to reduce its reliance on onshore trust borrowings, because onshore trust borrowings involve relatively higher funding cost.

Kaisa's liquidity is good. At 31 December 2018, the company's cash balance totaled RMB22 billion, an amount which can cover 131% of its short-term debt. Moody's expects Kaisa's cash holdings, together with its operating cash flow, are sufficient to cover its short-term debt, as well as estimated committed land payments over the next 12-18 months.

The stable outlook reflects Moody's expectation that Kaisa will maintain sales growth in high-tier cities, high profit margins and good liquidity.

The stable outlook also incorporates Moody's expectation that Kaisa will expand its access to funding over the next 12--18 months.