The outlook for the rating is negative.

RATINGS RATIONALE

"The downgrade reflects Moody's concern that Zhong An's weak property sales will continue and will negatively affect its liquidity position and credit metrics," says Franco Leung, a Moody's Assistant Vice President and Analyst.

The company achieved contract sales of about RMB1 billion in the eight months to August.

"Moody's believes Zhong An would be hard-pressed to achieve its full-year property pre-sales target of RMB3.8 billion for 2012. Its business is concentrated in Hangzhou in the Yangtze Delta where investment activities were very strong in the past but property sales have since been hampered by government restrictions on purchases; aimed at curbing property prices," adds Leung.

Zhong An's weak property sales have weakened its liquidity profile. Its cash-on-hand of RMB520 million (including restricted cash) is low relative to its short-term debt of about RMB1.2 billion.

It will also need additional debt to fund construction activities, given the low level of pre-sales proceeds.

In 1H 2012 the company's debt increased by RMB696 million to fund its developments. Its debt/total capitalization therefore increased to about 42% in June from about 38% in December 2011.

Zhong An's EBITDA/interest for the 12 months ending in June was around 2.2x; a fall from 2.5x between January and December 2011.

If the company does not achieve its target sales in 2012, its interest coverage will also weaken, and which will in turn continue to pressure its B2 rating.

Zhong An's B2 corporate family rating takes into consideration its low cost land bank and the quality of its land bank.

The company has indicated that it would be initiating a new strategy to increase commercial developments and invest in agricultural businesses. However, it may find it difficult to execute its new plan, due to a lack of funding.

Moody's is also concerned that Zhong An's weakened liquidity position could pressure the company to dispose of assets to cover debt repayments.

The negative outlook reflects the company's weak sales, which have weakened its liquidity position and credit metrics; the latter two factors in turn pressure its rating.

Zhong An's rating could be under pressure for a downgrade if (1) it generates contract sales below RMB1.8 billion and book revenues of less than RMB2.5 billion for the full year in 2012; (2) its liquidity profile further deteriorates, such that it has to rely on asset sales to continue its operations; or (3) if its access to bank loans significantly weakens.

The company's rating is unlikely to be upgraded, given its negative outlook.

However, the outlook could change to stable if the company can demonstrate a return to more consistent performance, such as achieving a level of contract sales and book sales equal to RMB3 billion or above. Moreover, its cash position would have to improve such that there is a narrowing in the difference between its cash-on-hand and short-term debt.

The principal methodology used in rating Zhong An Real Estate 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.

Zhong An Real Estate Ltd. develops residential and commercial properties in the Yangtze River Delta Area. It has a land bank of around 6.4 million sqm in gross floor area distributed mainly in Hangzhou and Yuyao in Zhejiang Province, Huaibei and Hefei in Anhui Province, as well as Suzhou in Jiangsu Province. Zhong An also has an investment portfolio, which includes a hotel (Holiday Inn) and a retail mall (Highlong Plaza) in Hangzhou.

The company was listed on the Hong Kong Stock Exchange in November 2007, and is majority-owned (around 68.4%) and controlled by its chairman, Mr. Shi Kancheng.

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Franco LeungAsst Vice President - 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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