OREANDA-NEWS.  Fitch Ratings has affirmed China-based Yuexiu Property Company Limited's (YXP) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed YXP's senior unsecured rating at 'BBB-'.

The affirmation of the IDR follows the affirmation of YXP's standalone rating of 'BB', which reflects its moderate leverage level, strong market position in Guangzhou and continued geographic diversification, which are partly offset by the company's weaker profitability arising from projects outside Guangzhou.

YXP's rating incorporates a two-notch uplift due to its strong linkage with its parent, Guangzhou Yuexiu Group Limit (GYX), in line with Fitch's Parent and Subsidiary Linkage criteria. GYX is wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC) of Guangzhou Municipality.

KEY RATING DRIVERS

Support from Parent: YXP's partnerships with other state-owned enterprises in Guangzhou via an investment fund demonstrate the support its parent GYX and the Guangzhou government provide to help the company acquire quality land parcels. GXP and YXP are also closely involved with Guangzhou's urban redevelopment projects, including the Guangzhou International Finance Center, a landmark skyscraper in the city.

Parent's Deconsolidated Financials Stable: GYX's debt increased in 2015 after the acquisition of Chong Hing Bank (CHB, BBB/Stable) in 2014 and a moderate rise in debt in its other core assets. However, the group's net leverage, excluding the finance businesses, remained stable in 2015. Real estate (under YXP), expressways (under Yuexiu Transport Infrastructure Limited., BBB-/Stable) and finance (comprising CHB and Yuexiu Finance Group, or YXF) account for the bulk of GYX's EBITDA. Furthermore, YXF is undergoing restructuring and Fitch does not expect its debt to rise significantly to add to GYX's leverage. Fitch expects GYX's three-prong strategy to remain intact and net leverage, excluding the finance business, to increase modestly, which will support GYX's standalone credit profile.

Standalone Leverage to Remain Stable: YXP's net debt/adjusted inventory was stable at 34.7% in 2015 (2014: 33.9%) as it continued to adopt a prudent land acquisition strategy. The land replenishment rate, measured by the ratio of gross floor area (GFA) acquired to contracted sales GFA, on attributable basis remained low at around 0.5x in 2014-2015. YXP has set a moderate sales growth target of around 4% in 2016 and plans to be selective in buying land following rapid growth in 2012-2013. Fitch expects YXP to maintain its current pace of land acquisitions, and the land premium for 2016-2017 will not exceed CNY7bn a year, or less than 30% of its estimated full-year contracted sales. With no new large investment property projects other than the Guangzhou Nanhai Starry Winking project under construction, YXP's leverage is likely to be below 40% in the next 18-24 months.

Margin Weaker Outside Guangzhou: YXP's EBITDA margin fell to 14.03% in 2015 from 17.32% in 2014 due to increased sales from lower-margin projects outside Guangzhou, lower EBITDA contribution from commercial projects, weaker average selling prices in a slower market, and higher land costs due to stiffer competition. YXP's long-term profitability is likely to stabilise in the mid to high teens, which is lower than previously. Margin will be supported by its quality land bank for which demand is resilient and more mature projects outside Guangzhou. Its land bank was 13.7 million square metres at end-2015, of which 88% were in Tier 1 and 2 cities.

Recurring Income Still Small: Rental increased 14% to CNY277m while recurring EBITDA interest coverage improved to 0.28x in 2015 (2014: 0.21x). Yuexiu Financial Tower started pre-leasing in 2015 and occupancy reached 70% in 1Q16. With the Guangzhou Nanhai Starry Winking project starting contribute to recurring income in 2017, Fitch expects recurring EBITDA interest coverage to stay around 0.3x over the next 18-24 months. This coverage is still low, with the investment property portfolio only accounted for around 16% of the group's total EBITDA in 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales to increase mid to high single digit a year over 2016-2018;
- Average selling price for contracted sales to be largely unchanged for 2016-2018;
- Gross profit margin at around 22% -24% in 2016-2018 (2015: 21.1%)

RATING SENSITIVITIES

Positive: Future developments that may individually or collectively, lead to positive rating action include:
- Evidence of stronger linkage with the parent and the Guangzhou government
- Recurring EBITDA interest coverage improving to above 1.0x
- Sustained improvement of contracted sales/total debt to closer to 1x (end-2015: 0.56x)

Negative: Future developments that may individually or collectively, lead to negative rating action include:
- Weakening linkage with the parent and the Guangzhou government
- Net debt/adjusted inventory exceeding 45%
- Contracted sales / total debt sustained below 0.60x
- Significant drop in contracted sales