OREANDA-NEWS. Fitch Ratings has affirmed China-based Redco Properties Group Ltd's (Redco) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with Stable Outlook. The agency has also affirmed Redco's senior unsecured ratings and its USD125m 13.75% senior notes due 2019 at 'B' with Recovery Rating of 'RR4'.

Redco's ratings are affirmed as it has maintained a healthy financial profile - its leverage as measured by net debt/adjusted inventory was low of 27% at end-2015 and EBITDA margin stayed at 25%. Its small business scale continues to constrain its ratings.

KEY RATING DRIVERS

Equity Issuance Lowers Leverage: Redco brought in Nanchang Municipal Public Real Estate Group Limited, a state-owned enterprise (SOE) in Nanchang in south-eastern China, as a strategic investor in 2015. The SOE took a 9.9% stake, making it the developer's third-largest shareholder. The equity issuance helped reduced Redco's leverage to 27% at end-2015 from 34% at end-2014. Furthermore, Fitch believes the new shareholder may improve Redco's access to prime land parcels in Nanchang.

Healthy Margins: Fitch expects the gross profit margin from property development to stay at around 27% (2015: 32%) in next two to three years, underpinned by the company's low-cost land acquired years ago and prudent land acquisition. The average cost of Redco's land bank was around CNY1,000 per square metre (sqm) as of end-2015, with more than 60% of the land was acquired before 2013 at low average cost of around CNY300 per sqm.

Limited Business Scale: Redco's scale with contracted sales of CNY4.1bn in 2015 is the smallest among rated peers in the 'B' category. Although it has sufficient land bank to support sales expansion for the next five years, Redco will still face significant pressure in replenishing its land bank given the rising land cost, increased competition for land, and its limited financial resources. Redco has a total land bank of 3.8 million sqm at end-2015 with 19 projects in its pipeline in seven cities. It does not have a significant presence outside its stronghold of Nanchang, the provincial capital of Jiangxi Province, where it ranked seventh in contracted sales GFA in 2015.

Projects Mostly in Secondary Locations: Redco's land bank is mainly located in the Tier-2 cities of Nanchang, Tianjin and Hefei, and most of the land parcels, except for the ones in Nanchang and Jinan, are situated at secondary locations. Fitch expects Redco's land bank to improve gradually, with the company's making effort to enter into Tier-1 cities, including Shenzhen, Guangzhou and Shanghai. This could raise its average selling price (ASP) to above CNY9,000 per sqm in the next two to three years from CNY6,828 per sqm in 2015.

Sufficient Liquidity: Redco had cash and cash equivalents of CNY1.7bn (excluding restricted cash of CNY669m), and CNY545m of undrawn bank facilities, which are sufficient to cover the company's short-term debt of CNY471m.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Redco include:

- Contracted sales ASP ranging from CNY8,000 per sqm to CNY10,500 per sqm during 2016-2017, supported by the company's projects in Tier-1 cities

- Land replenished at a rate of 0.8x-1.5x of annual contracted sales by gross floor area in the next two to three years, with land premium accounting for 40%-50% of total contracted sales

- Gross profit margin from property development at around 27%-28% underpinned by the low-cost land acquired years ago

- Land cost represents around 18%-20% of average selling price

RATING SENSITIVITIES

Positive: Future developments that may collectively lead to positive rating actions include:

- Annual contracted sales sustained above CNY8bn (2015: CNY4.1bn) without compromising leverage, and

- EBITDA margin sustained above 20% (2015: 25%), and

- Contracted sales/total debt sustained above 1.3x (2015: 1.3x).

Negative: Factors that may, individually and collectively, lead to negative rating action include:

- Net debt/ adjusted inventory sustained above 50% (end-2015: 27%), or

- EBITDA margin sustained below 15%, or

- Contracted sales/total debt sustained below 1.0x.