OREANDA-NEWS. Longfor Properties Co. Ltd's (Longfor; BBB-/Stable) ratings will benefit from its well-planned land bank acquisitions since 2014 and increasing recurring income, says Fitch Ratings.

Fitch expects Longfor to meet its higher contracted sales target of CNY75bn and continue delivering positive cash flow from operation. The company is also expected to maintain its strong financial profile, while capturing the current growth in China's property market.

Longfor's early-mover advantage in land bank replenishment is likely to support contracted sales growth for the next two years and improve its profitability. The company added land bank in 2015 in cities such as Beijing, Shanghai, Hangzhou, Nanjing and Suzhou, before the current property market growth. These cities, which account for 49% of the gross floor area (GFA) Longfor acquired in 2015, contributed 49% of its 1H16 contracted sales and 29% of its GFA sold.

Longfor replenished land in Beijing and Hangzhou in 1H16, but not in Shanghai, Nanjing or Suzhou, as land prices in these cities have risen rapidly. Longfor is focussing on acquiring land in cities with lagging growth, such as Jinan and Qingdao, which accounted for around 47% of Longfor's total GFA acquired in 1H16. Land bank of around 8 million square metres (sq m) attributable GFA in Yangtze River Delta and Southern China will cover around four years of sales. Fitch expects Longfor to continue benefiting from strong property markets in these areas, where it has been positioning its land bank since 2014.

Fitch expects Longfor to continue expanding its investment property in the short-to medium-term, leading to its recurring EBITDA gross interest coverage trending up in the next 18-24 months from around 0.36x at end-2015. We also expect the GFA of Longfor's retail malls to increase to 2.5 million sq m by 2017, after its GFA CAGR rose by 36% since 2011 to 1.5 million sq m in 1H16. The high occupancy rate of over 95%, steady rental growth and increasing GFA will support 25%-35% growth on Longfor's rental EBITDA for the next two years. The improvement on average funding costs of around 5.18% in 1H16 (1H15: 6.01%, end-2015: 5.74%) will also support its recurring EBITDA gross interest coverage.

Fitch expects Longfor's credit metrics to remain healthy and continue generating a stable EBITDA margin of 22%-24%. The company's EBITDA margin was maintained at around 22.3% in 1H16 (end-2015: 22.4%, end-2014: 22.1%), with a stable cash collection rate of 90%. Churn and leverage were also steady. Longfor's leverage, measured by net-debt/adjusted-inventory, including investment property valued at higher of cost or 5% yield, increased to around 36%, from 32.8% at end-2015. Fitch expects its total contracted-sales to total-debt to reach around 1.3x in 2016, compared to 1.04x in 2015 and 1.03x in 2014.