S&P revises outlook on Powerlong to stable from negative

HONG KONG: S&P Global Ratings has revised its outlook on Powerlong to stable from negative given enhanced debt control. At the same time, S&P affirmed ‘B+’ long-term issuer credit rating on the China-based developer, and the ‘B’ long-term issue rating on the company’s senior unsecured notes.

The stable outlook reflects that Powerlong will maintain its leverage at an improved level while delivering steady sales growth and profitability over the next 12 months.

“We revised the outlook on Powerlong to stable to reflect our view that the company has shown a commitment to financial prudence. We therefore believe Powerlong is likely to maintain its reduced leverage over the next two years. We also expect the company’s recurring rental income to continue to grow,” a press release said.

Powerlong’s control over debt growth and the company’s strong operating performance over the past six months have increased the likelihood of continued deleveraging.

Apart from stabilizing debt growth, Powerlong’s growing revenue recognition will help enhance its credit profile. The debt-to-EBITDA ratio improved to 5.8x in the first six months of 2019, from 7.0x in 2018. Revenue for the period increased 32%, supported by booking of projects sold over the past two years. We expect annual revenue growth of 30%-35% in 2019, and 22%-27% in 2020 and 2021, helping lower the leverage.

“We believe Powerlong will remain prudent in expanding its business scale. The company’s land acquisitions have picked up since the second quarter of 2019 and its attributable spending is about RMB12 billion in the first nine months of 2019, higher than our initial forecast. However, sales and cash collection were also stronger than our expectation”.

Powerlong may outperform its revised contracted sales target given its strong project launch pipeline and well positioned footprint in the Yangtze River Delta region. The company achieved contracted sales of RMB 45.1 billion in the first three quarters, representing 90% of its original target of RMB50 billion and 82% of its revised targets of RMB 55 billion. It also has sufficient saleable resources that we estimate at RMB 35 billion-RMB 40 billion in the last quarter of 2019. We also expect the company’s strong sales momentum to continue into 2020 and 2021, driving contracted sales up by 25%-30% annually. Powerlong’s contracted sales in 2018 were RMB 41 billion.

“We view the recent new share placement by Powerlong as credit positive. However, the immediate impact on the company’s credit profile would be limited due to the size of the placement. Powerlong issued 146.6 million new shares and raised new capital of RMB700 million in October 2019”.

The stable outlook on Powerlong reflects our view that the company will maintain its improved debt leverage while delivering steady sales and revenue growth with stable margins over the next 12 months. “We also expect Powerlong’s recurring rental income to continue to grow and cover the current proportion of interest expenses”.

S&P may downgrade Powerlong if the company fails to maintain its leverage during its expansion. A consolidated debt-to-EBITDA ratio weakening to above 6.0x over the next 12 months without signs of improving could indicate this weakening. This could happen if the company is more aggressive in debt-funded land replenishment or property investments.

“We may upgrade Powerlong if the company improves its debt leverage such that its debt-to-EBITDA stays below 5.0x on a sustainable basis. This could happen if Powerlong demonstrates commitment to stronger debt control while delivering revenue growth substantially beyond our expectations”.

Edited by Nayyar Iqbal

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