The ratings outlook is negative.
"The ratings upgrade reflects Hopson's ability to use internal sources to repay the USD350 million in senior notes which were due on 9 November. With this redemption, Hopson has no offshore debt maturing until 2016," says Jiming Zou, a Moody's Analyst.
"At the same time, the upgrade considers Hopson's 6.8% year-over-year improvement in contract sales in the first nine months of 2012. Given this positive trend, Moody's expects it to largely achieve its downwardly revised annual target of RMB12 billion in contract sales," says Zou.
Hopson's B3 corporate family rating and its negative outlook continue to reflect its still weak financial profile, as indicated by its low level of interest coverage, substantial level of short-term debt, and slow albeit improving contract sales.
The repayment of the USD350 million senior notes has also not materially changed its total debt level of RMB27 billion, as reported at end-June 2012. The company's EBITDA/Interest coverage is expected to remain at about 1.0x, positioning the rating at the low end of the single-B category.
At the same time, Hopson's liquidity position remains weak in comparison with other rated property developers. Its large amount of short-term debt versus a limited cash balance indicates continued liquidity pressures and makes it vulnerable to any adverse change in contract sales.
Furthermore, Hopson's high inventory level has tied up its cash. As of June 2012, unsold properties and properties under-development amounted to RMB63 billion, almost five times its annual contract sales. Its slow pace of contract sales was because of its focus on first-tier cities and residential property offerings in the higher price category. But purchase restrictions imposed by the authorities have adversely impacted this strategy.
"We expect Hopson to prioritize its cash liquidity management in the near term through cautious spending on property construction and preserving cash generated from contract sales," continues Zou.
Hopson has been able to extent a substantial share of its short-term borrowings, given its large business scale and its long-term relations with banks. In addition, it has substantial value in its assets, including investment properties of around RMB13.5 billion and completed properties for sale with a book value of RMB11 billion.
Hopson's Caa1 senior unsecured bond rating reflects legal and structural subordination risk. The company's secured and subsidiary debt-to-total assets ratio will stay at around 25% in the near to medium term, as it has to rely on onshore borrowing at the PRC subsidiary/project level to fund its operations and investments.
A rating upgrade is unlikely, given the negative outlook. However, the outlook could return to stable, if Hopson (1) further improves its liquidity position; (2) achieves its contract sales target; (3) reduces unsold inventory; and (4) improves interest coverage -- EBITDA/interest -- close to 2.0x.
The ratings could be downgraded, if Hopson (1) shows deterioration in its liquidity position; or (2) experiences declines in sales and profit margins; or (3) shows EBITDA/interest coverage less than 1.0x.
The principal methodology used in rating Hopson Development Company Holdings Limited was the Global Homebuilding Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Hopson Development Company Holdings Limited is one of the largest property developers in China with a land bank of 31.9 million square meters in gross floor area. Its principal business interests are residential developments in four major cities -- Guangzhou, Beijing, Shanghai, and Tianjin -- and their surrounding areas.
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Jiming Zou Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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