OREANDA-NEWS. Fitch Ratings has affirmed China Resources Land Ltd's (CR Land) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency senior unsecured ratings and the ratings of its rated issues at 'BBB+'.

The affirmation reflects CR Land's business model of maximising operating cash flow from its development properties to support the expansion of its investment property portfolio. CR Land enters major Tier 2 cities in China selectively, in line with its model of operating investment properties in prime locations nationwide. CR Land's strategy fits into its parent China Resources (Holdings) Company Limited's (CRH) aim to be an influential conglomerate that taps China's growing affluence.

KEY RATING DRIVERS
Extending Leadership in Prime Investment Properties: CR Land is taking the lead in establishing investment properties in prime locations in major Chinese cities. Fitch expects CRL's investment property portfolio to increase to 4.81m sqm of gross floor area (GFA) by end-2016, making it the largest high-end shopping mall operator in China. This compares with GFA of 2.98m sqm at end-2014. Fitch believes CR Land has one of the fastest-growing rental portfolios in China with good locations in Tier 1 and wealthier Tier 2 cities. Its assets are well managed and provide the company with steady rental income. The good asset quality is reflected in net rental yield of 5.7%, higher than an average of 3% among the large Hong Kong and Chinese property companies.

Stable Cash from Development: CR Land continues to generate cash flow from operations (CFO) for its property development business, even after taking into consideration land replenishment. CR Land has had to replenish its development land bank following the rapid increase in contracted sales between 2011 and 2013. The company's CFO in 2013 was HKD16.6bn even though its development land bank expanded by 38% from 2012 to 2014; Fitch expects its 2014 CFO to be marginally positive with investment property land acquisitions treated as capex. Asset injections from CRH will help CR Land maintain positive CFO generation since these projects already generate sales.

Continued Support from Parent: CR Land's business profile is strengthened by the operational benefits it enjoys as a core subsidiary of CRH. The parent provides land incubation support to CR Land in preparing prime land and large parcels for eventual development. CR Land's government linkage also gives it an edge in securing city-centre land in new cities that it hasn't yet entered. The company also enjoys lower funding costs - at a level similar to CRH's - when obtaining loans from its fellow subsidiaries.

Financial Headroom Supports Expansion: Fitch has focused on investment property credit metrics in our analysis, as CR Land's development business is moving into a stable state. The agency allocates all cash and debt supporting 30% of properties under development (net of presales proceeds) to the development business; and the remaining debt to the investment property business. Fitch expects CR Land's investment property debt/EBITDA to remain between 3.5x and 5.5x for 2014-2016, and net debt/recurring EBITDA to stay within 4.5x to 6.0x over the same period. CR Land's financial profile is comparable to higher-rated Hong Kong property investment companies.

Rapid Expansion Constrains Ratings: Fitch expects CR Land to continue the rapid pace of expansion in investment properties in 2015-2016. CR Land plans to open an average of five to six new investment properties - equal to GFA of almost 900,000 sqm each year - in 2015 and 2016. This is a significant increase compared with its existing investment property GFA of 2.98m sqm at end-2014.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
-The pace of acquisitions of land for development slowing down after 2015 to reach a steady state from 2016, with 7.8m sqm of GFA for development added annually.
-Opening of investment properties in 2014 to 2016 in line with management guidance
- GFA of investment properties under development to stabilise at 7.5m sqm from 2016, and new investment property development to stabilise at 1.4m sqm a year. Capex for investment property to peak in 2017
-Rental rates for its investment properties remain unchanged, as higher rates for existing properties offset by the lower rates for new ones.
-No change in cost of debt

RATING SENSITIVITIES
Positive: Positive rating action is unlikely in the next 12 to 18 months due to its rapid expansion plan, although stabilisation of the investment property operation at a substantially larger scale may lead to positive rating action.

Negative: Future developments that may individually or collectively, lead to negative rating action include:
- investment property net debt/recurring EBITDA sustained above 7.0x (Fitch 2014 estimate at 5.72x);
- investment property EBIT net interest coverage sustained below 2.5x (Fitch 2014 estimate at 5.29x );
- sustained negative CFO