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Research Report

30/09/2020 17:39

China developers' leverage improves amid govt debt controls

[ET Net News Agency, 30 September 2020] Moody's Investors Service said in a new report
that Chinese property developers' leverage is expected to improve as developers accelerate
revenue recognition and slow debt growth, although profit margins are set to contract.
"National contracted sales value growth (on a three-month moving average basis)
increased to 18.9% in August from 15.1% in July and 9.4% in June, driven by sound housing
demand and a pickup in economic growth. These factors will also support moderate sales
growth in the next 6-12 months," said Celine Yang, a Moody's Assistant Vice President and
For rated developers, solid contracted sales over the past 2-3 years will support their
revenue growth, while their debt growth will slow significantly from a high level in 2019
amid stricter regulatory controls on access to new borrowing.
Moody's expects developers' leverage, as measured by weighted average revenue/adjusted
debt, will improve to 66%-72% in 2020-21 from 62% for the 12 months ended 30 June 2020 and
63% for full-year 2019. However, their weighted average gross profit margin will contract
to around 28% for full-year 2020 and 2021 from 29% for the 12 months ended 30 June 2020
and 31% in 2019, due to rising unit land costs and property price controls.
Moody's August Liquidity Stress sub-indicator for rated high-yield Chinese developers
remained largely stable at 20.3% supported by the recovery in property sales since 2Q 2020
and the issuance of bonds for refinancing in both onshore and offshore markets.
The refinancing needs of rated developers remain high, with around US$55.6 billion of
onshore bonds and around US$47.2 billion of offshore bonds maturing or subject to put
options in the 12 months from 1 October 2020. While both offshore and onshore bond
issuance will remain accessible to developers for refinancing purposes, new borrowings
will be subject to tighter regulatory scrutiny and favor developers with good credit
quality. (KL)

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