Fitch Ratings has downgraded
The downgrade reflects our view that CGS's growth, brand reputation, profitability and funding access may be negatively affected by the heightened liquidity pressure at its sister company,
The RWN captures the risk of an erosion in CGS's liquidity and working capital, as well as any change in its financial policies.
The 'BB+' IDR is supported by CGS's leading market position, sustained operating and free cash flow (FCF) generation from its stable, asset-light business and robust net cash position.
Key Rating Drivers
Slower Growth: Weaker China property sales and CGH's liquidity stress may limit CGS's growth. CGH's projects accounted for 48% of CGS's revenue-bearing gross floor area (GFA) at end-2022. We have cut our forecast of CGS's property-management revenue growth to 7% in 2023 and 4% in 2024, from 16% and 15%, respectively, due to our expectation of a slowdown in CGH's sales and project delivery.
Reputation and Profitability Impact: We believe CGS's brand reputation could be affected by the credit stress at CGH. Existing customers are less likely to switch away from the company, but the acquisition of new third-party contracts may slow, dampening the company's medium-term profitability. This is because new contracts typically carry higher profitability than existing ones due to limited price adjustments for existing contracts and continuous cost inflation pressure.
Weakened Funding Access: CGS is maintaining its strong net cash position and management has stated that the company has little need for new external funding due to the high visibility over its cash-generative business and the company's reduced appetite for acquisitions. Fitch believes CGS's funding access could be affected by CGH's evolving situation but the company's relatively stable operating cash flow may continue to support financial flexibility. CGS said there is limited impact on its access to bank financing so far, and it has not provided any financial support, such as pledge guarantees, to CGH.
Rising Working Capital: CGS's trade receivable days have lengthened from about 60 in 2019 to over 130 in 2022. Fitch estimates working-capital outflow of
Common Shareholder and Chairperson: Any aggressive financial policy change, including a sharp increase in dividends or other cash outflows, would be detrimental to CGS in light of its ownership structure amid the recent liquidity distress at CGH. Ms.
However,
Solid Market Position: CGS is likely to maintain its leading market position despite our projections of slower growth. CGS had the largest GFA under management of 869 million sq m in
Derivation Summary
CGS's weakening brand reputation and pricing power together with the likely deterioration in its financial flexibility lead to the one-notch difference with the credit profile of
CGS's RWN reflects the potential erosion in its liquidity, working-capital position and change in financial policies, which may lead to negative FCF.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue-bearing GFA growth of 7% in 2023 and 4% in 2024;
Revenue growth of 0%-2% in 2023-2024 on lower revenue-bearing GFA growth, and a decrease in revenue from community value-added services and value-added services to non-property owners;
EBITDA margin of around 16% in 2023-2024, from 18% in 2022, reflecting a decline in the margin on community value-added services and value-added services to non-property owners;
Annual acquisitions of
A higher dividend payout ratio of 30% in 2023-2024 to capture cash leakage risks, despite the company's guidance of 25% (2022: 25% of core net profit, excluding one-off items such as impairment of goodwill and other intangible assets, according to the company);
Receivable days to increase to 165 in 2023 from 135 in 2022, leading to a
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The RWN will be removed if the negative triggers are not met
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to generate positive FCF
Evidence of further deterioration in working-capital position, including a material increase in receivables
Evidence of a material deterioration in liquidity
Signs of aggressive financial policies changes, including but not limited to a sharp increase in the dividend payout
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Robust Liquidity: CGS reported readily available cash and cash equivalents of
Issuer Profile
CGS is a leading residential property-management service provider in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
CGS has an ESG Relevance Score of '4' for Governance Structure due to concentrated ownership, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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