June 28, 2017 / 10:49 AM / a year ago

Fitch Affirms Sino-Ocean Group at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, June 28 (Fitch) Fitch Ratings has affirmed homebuilder Sino-Ocean Group Holding Limited's (Sino-Ocean Group) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. Fitch has also affirmed Sino-Ocean Group's foreign-currency senior unsecured rating, and the ratings on all the outstanding US dollar bonds it guarantees, at 'BBB-'. The full list of rating actions can be found at the end of this commentary. The affirmation reflects strong support from China Life Insurance Company Limited (China Life; A+/Stable), which provides a two-notch uplift from Sino-Ocean Group's standalone 'BB' credit profile. Sino-Ocean Group's standalone credit profile is supported by its strong focus on and leading position in targeted Tier 1 and 2 Chinese cities, increasing rental income, prudent land acquisitions, and its diversified funding channels. KEY RATING DRIVERS Support from China Life: China Life has positioned Sino-Ocean Group as its sole strategic real-estate investment platform in China. It holds 29.99% of Sino-Ocean Group and is committed to owning no less than 25% in the future. China Life's linkage with the property developer is strong and provides support for Sino-Ocean Group's rating level. China Guangfa Bank Co., Ltd. (BB+/Stable), in which China Life has a controlling stake, subscribed to 20% of the first phase of medium-term notes issued by Sino-Ocean Group in March 2017. Sino-Ocean may intensify its collaboration with China Life in investment property funds and the senior living business. Focus on Top-Tier Cities: Sino-Ocean Group continues to focus on Tier 1 and 2 cities, making it well-positioned to benefit from the strong demand in these cities. The Beijing-Tianjin-Hebei region will account for about 46% of its saleable resources in 2017 by value. At end-2016, 43% and 55% of Sino-Ocean Group's land bank by value was in Tier 1 and 2 cities, respectively, where the demand-supply dynamic is more balanced than in lower-tier cities. Sino-Ocean Group aims to raise contracted sales by about 20% to CNY60 billion in 2017, compared with CNY104 billion of saleable resources. Its contracted sales in January-May 2017 rose 59% to CNY22 billion, while the average selling price (ASP) for contracted sales rose 35% to CNY20,321. Rising Rental Income: Sino-Ocean Group's attributable rental income from investment properties and property management fees increased 12% to CNY1.7 billion in 2016, due to the addition of a new office building in Shanghai, and a higher rental rate and a higher occupancy rate achieved in its existing projects. Sino-Ocean Group is also expanding its real estate finance business and senior living business to provide an additional source of income in the long term. The contribution of new businesses is still immaterial, given their small scale. Prudent Land Acquisitions: Sino-Ocean Group's leverage, as measured by net debt/adjusted inventory (including guaranteed debt for joint ventures and associates), decreased to 34.9% in 2016 from 49.6% in 2015, due to stronger contracted sales and a prudent land acquisition strategy. The company acquired 19 projects for its land bank, with total gross floor area of 4.8 million sqm, at an attributable cost of CNY10.5 billion, which accounts for only 24% of its contracted sales proceeds in 2016. Fitch expects the company to spend about CNY20 billion-25 billion on land acquisitions in 2017, which will form about half of its contracted sales proceeds. Fitch expects its leverage ratio to increase to 35%-40% by end-2017 due to more land acquisitions. Lower Funding Costs: Sino-Ocean Group has developed diversified funding channels, including onshore bonds and offshore bank loans. The company sold domestic corporate bonds in May 2016 at 3.5% and redeemed the perpetual bonds issued in 2011. It also obtained approval for a CNY10 billion MTN programme and issued CNY4 billion as the first tranche at 4.77%-5.05%. The proceeds will be used to refinance its existing borrowings. The company reduced its average funding cost to 5.38% in 2016 from 6.25% in 2015. Fitch expects its funding cost to decline further to about 5% in 2017. DERIVATION SUMMARY Sino-Ocean Group's standalone rating is more reflective of 'BB' category peers such as Guangzhou R&F Properties Co. Ltd. (BB/Stable), Beijing Capital Development Holding (Group) Co., Ltd. (BCDH, BBB-/Stable, standalone BB/Stable), and Yuexiu Property Company Limited (Yuexiu, BBB-/Stable, standalone BB/Stable). Sino-Ocean Group's contracted sales scale is smaller than Guangzhou R&F's and BCDH's, but higher than Yuexiu's. Its leverage of 35% is similar to Yuexiu's, but lower than Guangzhou R&F's and BCDH's. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales of CNY50 billion-70 billion per year in 2017-2019 (2016: CNY50.4 billion) - EBITDA margin (excluding capitalised interest) at 23%-26% in 2017-2019 (2016: 23.9%) - Annual land replenishment cost at about 50% of total contracted sales for 2017-2019 (2016: 21%) - Attributable rental income from investment properties at about CNY1.8 billion-2.0 billion for 2017-2019 (2016: CNY1.7 billion) RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Evidence of strengthening linkage with China Life -EBITDA margin (excluding capitalised interest) sustained above 25% (2016: 23.9%) -Net debt/adjusted inventory (including guaranteed debt for JVs and associates) sustained below 35% (2016: 34.9%) -Contracted sales/gross debt (including guaranteed debt for JVs and associates) sustained above 1.25x (2016: 1.0x) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -EBITDA margin sustained below 20% -Substantial decrease in contracted sales -Net debt/adjusted inventory (including guaranteed debt for JVs and associates) rising close to 50% - Contracted sales/total debt (including guaranteed debt for JVs and associates) sustained below 0.8x -Evidence of weakening linkage with China Life LIQUIDITY Ample Liquidity: At end-2016, Sino-Ocean Group had unrestricted cash of CNY19.1 billion, enough to cover the short-term debt of CNY6.2 billion. The company issued CNY4 billion in domestic bonds in March 2017. It also has approved but unutilised facilities of CNY118.7 billion at end-2016. This will be sufficient to fund development costs, land premium payments and debt obligations during 2017. FULL LIST OF RATING ACTIONS Sino-Ocean Group Holding Limited -- Long-Term Issuer Default Rating affirmed at 'BBB-'; Stable Outlook. -- Long-term senior unsecured rating affirmed at 'BBB-'. Sino-Ocean Land Treasure Finance I Limited -- Rating on outstanding US dollar bonds affirmed at 'BBB-'. Sino-Ocean Land Treasure Finance II Limited -- Rating on outstanding US dollar bonds affirmed at 'BBB-'. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Winnie Guo Associate Director +852 2263 9969 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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