Moody’s: Chinese property developers’ 2017 credit profiles to improve, despite slowing sales growth
Moody’s Investors Service says that the credit metrics of Chinese residential property developers rated by Moody’s will improve in 2017, despite slowing sales growth and against the backdrop of tighter government controls.
“In 2017, we expect that many of the Chinese property developers that we rate will report their strongest credit metrics in three years, because growth in contracted sales and revenues will outpace debt growth for the first time since 2015,” says Kaven Tsang, a Moody’s Vice President and Senior Credit Officer.
Moody’s further points out that rated Chinese developers’ funding cost will reduce in 2017 from 2016 because of the low-cost funding raised in onshore and offshore markets since 2016.
“We also expect our rated developers will continue to increase their market share — despite a more challenging operating environment in 2017 — given their strong branding and execution abilities, financial strength and access to funding,” says Chris Wong, a Moody’s Analyst.
Moody’s conclusions are contained in its just-released report titled “Property — China: Rated Developers’ 2017 Credit Profiles Will Improve Despite Slowing Sales Growth,” and is co-authored by Tsang and Wong.
In the report, Moody’s says that the developers’ leverage will fall after peaking in 2016. Investment-grade developers will report the largest improvement in leverage, because of their disciplined financial management and strong sales and revenues. A number of single-B developers’ leverage will also improve, owing to better revenue recognition after debt-funded expansion over the last two years.
Moody’s estimates that the rated developers’ weighted-average revenue/adjusted debt will improve to 74% at year-end 2017 from 63% at year-end 2016, and adjusted debt/adjusted capitalization will fall to 60.4% from 61.2%.
As for gross margins, the results will be mixed, with Ba-rated developers showing improvement, due to the better positioning of their land banks and lower inventory pressure. By contrast, B-rated developers will demonstrate lower margins, driven by a few developers entering into high-tier cities with higher land costs. As a result, the weighted-average gross profit margin in 2017 for all Chinese developers rated will remain largely flat at 26.0% in 2017 versus 26.1% in 2016.
The weighted-average EBIT/interest coverage for Moody’s-rated Chinese developers will continue improving in 2017, owing to higher EBIT generation and the low cost financing raised since 2016. The ratio will likely rise to 3.2x in 2017 from 2.9x in 2016.
With liquidity, Moody’s says that the rated developers’ liquidity buffers peaked in 2016 and will fall in 2017 as cash flow generation from contracted sales slows and because onshore bond market tightens.
Moody’s further says that the rated developers’ offshore refinancing needs will be modest in 2017, but refinancing needs for their onshore bonds will increase significantly in 2018 to around RMB199 billion from RMB39.5 billion in 2017.
Moody’s rates 51 Chinese property companies. Moody’s report titled “Property — China: Rated Developers’ 2017 Credit Profiles Will Improve Despite Slowing Sales Growth” is based on 35 developers rated B- to Baa that reported their 2016 financial results before 21 April 2017. The 35 are among the largest and most representative developers in Moody’s portfolio of Chinese residential property firms.