OREANDA-NEWS. The decline in Sino-Ocean Group Holding Limited's (Sino-Ocean Group; BBB-/Stable) leverage to 32.9% at end-June 2016 from 38.6% at end-2015 is in line with Fitch Ratings' expectations and supports the rating on the China-based residential developer.

The drop in leverage, as measured by net debt/adjusted inventory, was driven by a decrease in total debt to CNY43.0bn at end-June 2016 from CNY54.5bn (including perpetual notes) at end-2015. Sino-Ocean Group's leverage is lower than that of 'BB' rated peers that have higher level of contracted sales, such as Guangzhou R&F Properties Co. Ltd. (BB/Negative), Country Garden Holdings Co. Ltd. (BB+/Stable), and Greenland Holding Group Company Limited (BB+/Negative). Fitch expects Sino-Ocean Group's leverage to increase moderately due to a higher budget for land acquisitions in 2H16, but it should remain below 45% at end-2016, which is below the 50% threshold at which Fitch would consider negative rating action.

Sino-Ocean Group spent CNY7.3bn on acquiring land in Tier 1 and 2 cities in January-July 2016, mainly through mergers and acquisitions, instead of from land auctions. Fitch expects the company to spend about CNY15bn on land in 2016, which will form about one third of its contracted sales target for the year.

The company is well-positioned to tap opportunities to increase its land bank given its low leverage ratio. It could add more land through acquisitions of redevelopment projects with joint venture partners, and enter Tier 2 cities with strong potential in central China. For example, Sino-Ocean Group and its major shareholder China Life Insurance Company Limited (A+/Stable) are jointly developing a commercial project in Beijing's central business district and planning to develop an office building in Henan province. The company is also in discussions with its second-largest shareholder, Anbang Insurance Group Company Limited, on property projects.

Sino-Ocean Group and China Life Insurance may seek further co-operation in real-estate investment funds and other businesses, which may enhance Sino-Ocean Group's position in future land acquisitions because the insurer is a market leader with a well-known brand.

Sino-Ocean Group had an attributable land bank of about 14 million square metres at end-June 2016, which should be sufficient for property development and investment in the next four to five years.