Sino-Ocean Land Treasure Finance II Limited — Moody’s downgrades Sino-Ocean’s ratings to Ba2; outlook remains negative

Rating Action: Moody’s downgrades Sino-Ocean’s ratings to Ba2; outlook remains negativeGlobal Credit Research – 05 Sep 2022Hong Kong, September 05, 2022 — Moody’s Investors Service has downgraded Sino-Ocean Group Holding Limited’s corporate family rating (CFR) to Ba2 from Ba1.At the same time, Moody’s has downgraded to Ba2 from Ba1 (1) the senior unsecured ratings on the bonds issued by Sino-Ocean Land Treasure Finance I Limited, Sino-Ocean Land Treasure Finance II Limited, and Sino-Ocean Land Treasure IV Limited and guaranteed by Sino-Ocean; and (2) to B1 from Ba3 the subordinated, guaranteed perpetual capital securities issued by Sino-Ocean Land Treasure III Limited and guaranteed on a subordinated basis by Sino-Ocean.The outlook remains negative. »The rating downgrade reflects Sino-Ocean’s weakened standalone credit profile, driven by its deteriorated funding access and reduced financial flexibility because of its increasing pledge of assets for financing and use of internal cash to repay maturing debt amid challenging operating conditions, » says Cedric Lai, a Moody’s Vice President and Senior Analyst. »The negative outlook reflects uncertainties over Sino-Ocean’s ability to raise new unsecured long-term funding to maintain its liquidity buffer, » adds Lai.RATINGS RATIONALEMoody’s expects Sino-Ocean’s operating performance to worsen over the next 12-18 months amid difficult operating conditions. Specifically, Moody’s forecasts Sino-Ocean’s contracted sales will decline to around RMB100 billion in 2022 and RMB92 billion in 2023, from around RMB136 billion in 2021. Its contracted sales decreased 17% during the first seven months in 2022 to RMB52.0 billion compared with the same period in 2021.Despite the challenging funding conditions, Moody’s expects Sino-Ocean to maintain adequate liquidity over the next 12-18 months. However, the company’s liquidity buffer will likely decrease over the same period as it will repay some of the maturing debt using its internal cash source given its weakened ability to raise new funds. Its unrestricted cash balance reduced to RMB14.6 billion as of the end of June 2022 from RMB21.7 billion as of the end of 2021, due to repayment of some maturing debt using internal cash as well as lower contracted sales.Sino-Ocean will also likely offer price discounts to support its contracted sales amid the difficult market conditions, which will pressure its profit margins. Moody’s projects the company’s gross margin will further decline to around 16% over the next 12-18 months from 19% in the first half of 2022. As such, Moody’s expects the company’s interest coverage, as measured by adjusted EBIT/interest expense, will decrease to 2.3x-2.5x over the next 12-18 months from 2.8x for the 12 months ended June 2022. Its debt leverage, as measured by revenue/adjusted debt, will weaken to around 58% over the next 12-18 months from about 69% for the 12 months ended June 2022.Sino Ocean’s Ba2 CFR incorporates its standalone credit quality and one-notch of rating uplift, stemming from expected support from China Life Insurance Co Ltd, in times of need. This view also factors in China Life’s ability to support Sino Ocean, as illustrated by its A1 insurance financial strength rating (IFSR).Sino-Ocean’s senior unsecured bond rating is not affected by subordination to claims at the operating company level. Despite Sino-Ocean’s status as a holding company, Moody’s expects support from China Life to Sino-Ocean to flow through the holding company rather than directly to its main operating companies, mitigating potential differences in expected losses that could arise from structural subordination.In terms of environmental, social and governance (ESG) factors, Moody’s has considered the company’s (1) strong shareholders and representation on its board of directors; (2) disclosure of material related-party transactions as required by the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange; and (3) diversified board of directors and four special committees to supervise the company’s operations.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody’s could downgrade the ratings if the company’s sales fall significantly, liquidity further weakens, or it undertakes aggressive debt-funded acquisitions that worsen its key credit metrics, such that reported net debt remains elevated, or EBIT/interest falls below 2.3x-2.5x, on a sustained basis.Moody’s could also downgrade the ratings without a decline in the company’s standalone credit profile, if Moody’s further lowers its assessment of support from China Life for Sino-Ocean. This situation could result from any indication of a decrease in China Life’s ownership of Sino-Ocean; further reduction of Sino-Ocean’s economic and strategic importance to China Life; or a deterioration in China Life’s own credit profile.An upgrade of Sino-Ocean’s ratings is unlikely over the next 12 months, given the negative outlook.However, Moody’s could revise the outlook to stable if (1) Sino-Ocean demonstrates resilience amid difficult operating conditions through stabilizing its business performance, maintaining its adequate liquidity and funding access; and (2) China Life continues to provide operational and financial support to Sino-Ocean, in times of need.Credit metrics indicative of a stable outlook includes EBIT/interest above 2.8x-3.0x on a sustained basis.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.Sino-Ocean Group Holding Limited (Sino-Ocean) is a leading property developer in China. The company focuses on developing mid- to high-end residential properties, office premises and retail properties. As of the end of June 2022, it had a land bank of about 49.5 million square meters across 62 cities mainly in China.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.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.) 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