China Evergrande Group

The stable outlook reflects our expectation that Evergrande's more controlled land acquisitions will be able to partially offset the impact from slowing contracted sales growth and margin compression, such that its leverage will stay at 6x-7x debt to EBITDA over the next 12 months. We also expect the spending on other segments (such as new energy vehicles), albeit increasing, will not derail its leverage trend. We also anticipate the company will use its ample cash balance to support its liquidity position to avoid further deterioration. We may lower the rating if Evergrande's liquidity deteriorates, with liquidity sources materially below uses. This could happen if we believe the company will need to repay its strategic investments which may overburden its liquidity

...Uneven capital structure with huge short-term obligations remains key rating constraint.China Evergrande Group's liquidity would likely stay tight in the next 12 months. The company had short-term maturities of Chinese renminbi (RMB) 375 billion as of June 30, 2019, an increase of 18% from Dec. 31, 2018. Trust financing, cash-pledged offshore borrowings, and entrusted loans--financing that typically has short maturities and high costs--comprised 50% of its reported debt. In addition, Evergrande may need to repay the first two of three batches of A-share pre-listing strategic investments (RMB70 billion in total), given the deadline for its listing in January 2020. That said, we expect Evergrande to be able to negotiate an extension for part of the strategic investments. We also believe further downside risk on liquidity is manageable, underpinned by Evergrande's efforts to boost sales and expedite cash collection, as well as its ample unrestricted cash balance of RMB207 billion. Leverage...

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