Developers unlikely to face rerating

The devastating earthquake in Sichuan was unlikely to have any immediate impact on credit rating for developers with projects in the province, although profit margins and operating cash flow would be under pressure from possibly rising costs, Moody's Investors Service said.

China Overseas Land & Investment, Agile Property Holdings, China Properties Group, Coastal Greenland and Neo-China Land Group, which have projects in the affected areas, 'will probably experience some negative repercussions, including likely delays in developments and sales', said the rating agency's assistant vice-president, Kaven Tsang.

But the impact was not strong enough to warrant changes in their rating or outlook, Mr Tsang said.

It was too early to assess accurately the full impact, but materials and labour costs could rise as demand increased in response to recovery and reconstruction work, he said. That, in turn, could squeeze margins and operating cash flow.

However, cash flow generated from Chengdu and Chongqing does not constitute a material sum for most of the developers.

Only 10 to 15 per cent of the projected property cash income for China Overseas Land, Agile, Coastal Greenland and Neo-China would have been from these cities this year, Mr Tsang said.

Meanwhile, developers with broader geographic coverage would have greater flexibility in making up for lost sales from Sichuan, he said, citing China Overseas Land as an example.

Nevertheless, the agency raised concern about China Properties for its heavy exposure to Chongqing, with projects contributing to material forecast cash flow this year, vice-president and senior credit officer Peter Choy said. 'While the company still plans to have pre-sales in the fourth quarter, Moody's is mindful of potential delays,' he said.

He added that its adequate liquidity position could help it withstand the delay in sales for the time being.

Moody's said the ability to reach sales targets across the nation was a larger rating driver for these firms.