OREANDA-NEWS. Fitch Ratings has affirmed homebuilder China Jinmao Holdings Group Limited's (Jinmao; BBB-/Stable) Long-Term Foreign-Currency IDR and senior unsecured rating at 'BBB-'. The Outlook is Stable. The agency has also affirmed bonds issued by Jinmao and Franshion Brilliant Limited at 'BBB-'.

The affirmation reflects Jinmao's continued strong performance in its property development business, which is driven by its good quality land bank and strong positioning in Tier-1 and 2 cities. The rating is also supported by Jinmao's stable recurring income, its primary land sales recovery, and moderate leverage.

KEY RATING DRIVERS

Strong Property Sales: Jinmao's sales from property development rose 50% to CNY27.8bn in 2015. Contracted sales continued to rise strongly, by 40.6% to CNY9.7bn in the first five months of 2016, well on track to achieve the company's target of CNY30bn for the year. The company expects 50% of 2016 contracted sales to come from Tier-1 cities, with Shanghai making up 27% of the total. The increasing sales from Tier-1 and affluent Tier-2 cities would support margin expansion. The quality of Jinmao's land bank is strong - it had 13 million square metres (sqm) of land at end-2015, most of which is in Tier-1 and Tier-2 cities.

Stable Recurring EBITDA: The company's recurrent income from the investment property and hotel businesses on consolidated basis rose 6.4% in 2015, with EBITDA margin widening to 40% from 31.3% in 2014, which reflected the more stable operation of new hotel assets. The three new hotels that have opened since 2014 recorded much higher revenue per available room and started to contribute profit in 2015. Fitch expects Jinmao's recurring EBITDA to interest coverage to improve to 0.5x in 2017 from 0.4x in 2015 on a deconsolidated basis, as a new R&D center in Changsha and shopping malls in Changsha and Qingdao are added to the portfolio by end 2016. However, 87% of the recurring income from investment properties (excluding hotels) still comes from the company's two main office buildings in Shanghai and Beijing.

Land Development to Harvest: Jinmao's land sales are rebounding after a tough 2015 due to the government's strict land control in Changsha, where Jinmao operates its Meixi Lake Projects. However, Jinmao has successfully sold three land parcels for CNY4.6bn in total in the year to date at selling price as high as CNY19,476 per sqm, compared with CNY10,462 last year in its Nanjing project. Therefore we expect profit margin for the company's land development segment to exceed 50% in 2016.

The unsold primary land in Meixi Lake Phase 1 would be a stable source of cash for Jinmao as land costs have already been paid and it does not need to incur further development expenditure. Fitch estimates Jinmao can generate another CNY10bn of cash from selling the rest of Meixi Lake Phase 1. The unsold primary land in the Meixi Lake Phase 2 and Nanjing Qinglong Mountain projects amounted to about 16 million sqm at end-June 2016, which will sustain more than 10 years of development to support property sales.

Moderate Leverage: Jinmao's net debt/adjusted inventory, including the investment property business, increased slightly to 35.9% at end-2015 from 34.7% at end-2014 on a deconsolidated basis. The net leverage ratio is not likely to increase further, given strong contracted sales performance both in property sales and land sales, and the estimated capex for future development. Fitch expects Jinmao's net leverage to fall below 35% in the next 12 months as it has completed construction for most of the new investment properties in the pipeline and its strong land bank means it is not under pressure to aggressively acquire land in the short term.

Advantage in Government Linkage: Jinmao's business continues to be supported by its status as a state-owned property company. This provides the company with an advantage in government-led strategic projects, and helps provide strong access to domestic bank funding. This is illustrated by the favourable locations of its investment properties and commercial development projects.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Jinmao include:
- contracted sales (including primary land sales) to increase in the low to mid teens to reach CNY36bn in 2016, CNY43bn in 2017
- Gross profit margin of property development remains above 40% in the next 24 months
- Gross profit margin of land development remains at 50% in the next 24 months
- Investment property and hotel revenue rises in the single digits and EBITDA margin at 60% in the next 24 months

RATING SENSITIVITIES

The following ratios and numbers apply to Jinmao after the deconsolidation of Jinmao Investment Holdings (JI), unless specified.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Net debt/adjusted inventory, including investment property business, remaining above 35% on a sustained basis
-Substantial decrease in margin and total sales in property development and land development from 2015
-(Recurrent EBITDA + dividends from JI)/gross interest expense ratio falling below 0.5x on a sustained basis (2015: 0.42x)
-Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group's equity stake in Jinmao to under 51% (53.97% as at end-2015), or a shift from strategic projects due to weaker relationships with local governments
-Reduced access to onshore bank loans or inter-company funding support

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-maintaining (recurrent EBITDA + dividends from JI)/gross interest expense above 1.5x with similar scale and healthy leverage in property development on a sustained basis, or
-contracted sales from project development and land development of over CNY35bn with strong margin on a sustained basis, while keeping healthy leverage and (recurrent EBITDA + dividends from JI)/gross interest expense ratio over 1.0x