OREANDA-NEWS. Fitch Ratings has affirmed Yuzhou Properties Company Limited's (Yuzhou) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'. The Outlook on the IDR is Stable. Fitch has also affirmed Yuzhou's senior unsecured rating and the ratings on its outstanding US dollar bonds at 'BB-'.

The China homebuilder's ratings are supported by its strong contracted sales growth, region diversification, and favourable margin compared with its peers. Its recent expansion into the Yangtze River Delta will increase its leverage, but Fitch believes a rise to around 40% of net debt-to-adjusted inventory in the next 12 months will be reasonable as it has acquired good quality sites and achieved a much larger operating scale.

KEY RATING DRIVERS

Expansion On Track: Fitch believes Yuzhou's recent expansion in Shanghai, Nanjing and Hangzhou will help it set up core markets in two regions - the West Strait Economic Zone and the Yangtze River Delta - improve the company's inventory quality, and diversify its portfolio. Yuzhou is a leading property developer in Fujian province and Hefei, but has acquired eight land parcels in Shanghai and Nanjing since 2015. Contracted sales in the latter two cities reached CNY3bn in 1H16, or 24% of total contracted sales, compared with CNY1bn, or 7% of total contracted sales, in 2015. Yuzhou has also acquired sites in Hangzhou through the purchase of a company for CNY4.1bn in July 2016.

Leverage Increase to be Reasonable: Fitch expects Yuzhou's leverage, measured by net debt-to-adjusted inventory, to increase to 35%-40% by the end of 2016 (2015: 30%). The increase will be driven by the high land premiums as the company expands. The attributable land cost-to-contract sales ratio was over 65% in 1H16, which was higher than its peers' average of 40%-50%. However, a rise in leverage to about 40% by end-2016 would still be reasonable because of the good quality of its recent land purchases and Yuzhou's enlarged scale. Yuzhou's contracted sales jumped 124% yoy to CNY12.9bn 1H16.

Margin Under Pressure; Still Robust: Yuzhou's consistently high EBITDA margin of over 30% is likely to come under pressure due to the significant rise in land costs. However, Fitch expects the company to maintain a robust margin because most of the land purchased is in major cities in the Yangtze River Delta and have high sales potential; the company has a record of achieving higher-than-average selling prices, and it has low selling, general and administrative expenses. Yuzhou's margin has been high mainly because of its low unit land costs, of about 22% of average selling price in 2014. However, this ratio quickly increased to 30% in 2015 as land costs climbed, and it is likely to rise further because the unit cost of land Yuzhou acquired in 1H16 is about triple the average cost of total land bank at end-2015.

Healthy Liquidity: Yuzhou has total cash of CNY11.9bn at end-2015, which is more than enough to cover its short-term debt of CNY4.0bn, and support its planned expansion. The company has diversified funding channels to ensure the sustainability of its liquidity. Besides bank loans, it has established channels for both onshore and offshore bond issuance, as well as equity placement.

KEY ASSUMPTIONS

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

- Contracted sales to increase by more than 25% in 2016 as Yuzhou continues its expansion into the Yangtze River Delta

- Higher average selling prices and unit land costs as Yuzhou increases exposure in Tier 1 and Tier 2 cities like Shanghai, Nanjing and Hangzhou

- Land acquisitions in line with sales growth in 2016, and account for around 50% of total contract sales

RATING SENSITIVITIES

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

- Net debt/adjusted inventory sustained above 45% (2015:30%)

- Contracted sales / net inventory sustained below 0.6x (2015: 0.6x)

- EBITDA margin sustained below 20% (2015: 37%)

- Significant drop in contracted sales from current scale (1H16: CNY12.9bn)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Sustaining a leading status in core markets of both the West Strait Economic Zone and the Yangtze River Delta

- Net debt/adjusted inventory sustained below 40%

- Contracted sales / net inventory sustained above 0.8x

- EBITDA margin sustained above 25%

FULL LIST OF RATING ACTIONS

Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Stable

Senior unsecured rating affirmed at 'BB-'

USD300m 8.75% senior notes due 2018 affirmed at 'BB-'

USD300m 8.625% senior notes due 2019 affirmed at 'BB-'

USD250m 9% senior notes due 2019 affirmed at 'BB-'