Prudent expansion moderates pressure for Chinese developers

    Moody's Investors Service said that overall 2015 sales and revenue growth across 12 Ba and B-rated Chinese developers it profiled will likely moderate, with revenue recognition better matching debt-funded growth. Gross margins are expected to decline at a slower rate as selling prices stabilize.
  Moody's latest report, titled "China property - Relative Comparison: Performance and Credit Metrics of 12 Ba/B-rated Chinese Developers", features a new template for relative comparison, focusing mainly on scale, profitability, leverage, interest coverage and liquidity. It compared the financial profiles of 12 selected Ba-rated and B-rated Chinese developers based on their 2014 results. They are also active issuers of dollar-denominated debt with approximately $18 billion of rated dollar bonds outstanding.
  "Sales and revenue growth for the rest of 2015 will moderate, and we expect gross margins to decline at a slower rate as the market recovers and prices stabilize," said Stephanie Lau, a Moody's Assistant Vice President.
  Moody's highlighted Country Garden Holdings Company Limited (02007)(Ba2 review for upgrade) as having a strong financial profile among the group, while noting that Evergrande Real Estate Group Limited's (B1 negative)(03333) high leverage and weak liquidity overshadows its scale, and strong revenue and sales growth.
  More moderate sales and revenue growth is expected in 2015, which means some of the issuers are therefore unlikely to repeat their strong 2014 revenue growth in 2015, added the rating agency. 
  Overall, 2015 gross margins are expected to decline at a slower rate. Moody's expects selling prices to stabilize amid a market recovery.
  Looking ahead, developers' revenue recognition will better match debt-funded growth in 2015 as rated developers slow their growth plans and equity issuance becomes more attractive. In 2014, single B-issuers' weighted-average debt growth (48%) outstripped their weighted-average revenue growth (19%). Future Land Development Holdings Limited (Ba3
stable)(01030), Longfor Properties Co. Ltd. (Ba1 stable)(00960) and Country Garden reported strong revenue/adjusted debt ratios in 2014, while Yuzhou Properties Company Limited (01628)(B1 stable), Evergrande and KWG Property Holding Limited (01813)(Ba3 negative) were among the weakest, notes the rating agency.
  In addition, concerns of high leverage for many rated developers are moderated by their sufficient interest coverage and adequate liquidity. Longfor and Shimao (00813)ranked the highest by interest coverage in 2014 of over 4.0x, above the average 3.3x for the 12 developers, while Evergrande and Sunac China Holdings Limited (B1 stable)(01918) were the lowest at <2.0x. Most issuers maintained adequate liquidity. Particularly, KWG and Yuzhou's large liquidity buffers increased Moody's tolerance for their high leverage.