OREANDA-NEWS. 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 Land's standalone credit profile is supported by its strong focus on and leading position in targeted Tier 1 and 2 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 Life purchased 15% of Sino-Ocean Group's 10-year domestic corporate bonds in August and October 2015.

Fitch believes the emergence of Anbang Insurance Group Company Limited as the second-largest shareholder will not affect the relationship between China Life and Sino-Ocean Group.

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, particularly Beijing, which will account for about 29% of its saleable resources in 2016 by value. The company exited some Tier 3 cities in 2014 and continued destocking in 2015. At end-2015, 55% and 44% of Sino-Ocean'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 11% to CNY45bn in 2016, compared with its CNY78.5bn of saleable resources. Its contracted sales in January-May 2016 rose 43% yoy to CNY13.9bn, while the average selling price (ASP) for contracted sales rose 18% yoy.

Rising Rental Income: Sino-Ocean Group's revenue from investment properties and property management fees (including rental income from JVs and associates based on attributable interests) increased 32% to CNY1.5bn in 2015, as the shopping center project, Sino-Ocean Taikoo Li Chengdu, was fully opened in 2015. Its consolidated rental EBITDA improved to CNY748m in 2015 from CNY589m in 2014. This segment accounted for 13% of its total reported EBITDA in 2015, with property development making up most of the rest. Sino-Ocean Group is also expanding its real estate finance business and other businesses to build synergies with its homebuilding operation and 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, decreased to 38.6% in 2015 from 40.5% in 2014, because the company acquired only CNY7bn of land versus CNY16bn in 2014. Sino-Ocean Group spent CNY4.3bn on acquiring land in Tier 1 and 2 cities in January-May 2016, mainly by mergers and acquisitions, instead of from land auctions. Fitch expects the company to spend about CNY15bn on land acquisitions in 2016, which will form about one third of its contracted sales target.

Lower Funding Costs: Sino-Ocean Group has developed diversified funding channels, including onshore bonds and offshore bank loans. The company raised CNY14bn via the issue of domestic corporate bonds over August 2015-May 2016. These bonds had maturities of five to 10 years and interest rates of 3.5%-5.0%. The proceeds will be used to refinance some of its offshore bonds and the perpetual bonds issued in 2011. Fitch expects the company to trim its total debt to CNY46bn-47bn by end-2016 from CNY54.5bn (including perpetual bonds) at end-2015. The company reduced its average funding cost to 6.25% in 2015 from 7.08% in 2014. Fitch expects funding cost to further decline to 5.5%-6.2% in 2016 and 2017.

KEY ASSUMPTIONS

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

- Attributable contracted sales of CNY40bn-50bn a year in 2016-2018.

- EBITDA margin (excluding capitalised interest) at 22%-23% in 2016-2018

- Flexible land acquisition strategy consistent with that of the past, with attributable land cost around CNY15bn-20bn a year for 2016-2018

- No problems in obtaining construction loans to finance construction costs for 2016-2017

RATING SENSITIVITIES

Positive: Fitch does not envisage any positive rating action within the next 12-18 months, given the scale and diversification of the company, but future developments that may, individually or collectively, lead to positive rating action include:

- Evidence of strengthening linkage with China Life

- EBITDA margin (excluding capitalised interest) sustained above 25% (2015: 20.6%)

- Net debt/adjusted inventory sustained below 35% (2015: 39%)

- Contracted sales/gross debt sustained above 1.25x (2015: 0.7x)

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- EBITDA margin sustained below 20%

- Substantial decrease in contracted sales

- Net debt/adjusted inventory rising close to 50%

- Contracted sales/total debt sustained below 0.8x

- Evidence of weakening linkage with China Life

LIQUIDITY

Ample Liquidity to Moderate: At end-2015, Sino-Ocean Group had CNY20.3bn in cash and CNY3.4bn in restricted cash, enough to cover the short-term debt of CNY11.1bn (including perpetual bonds). Fitch expects the group's available cash balance to fall to around CNY15bn after reducing its debts in 2016. This will be sufficient to fund development costs, land premium payments and debt obligations during 2015-2017 due to its diversified funding channels and flexible land acquisition strategy. The company has approved but unutilised facilities of CNY89.3bn at end-2015.

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-'