OREANDA-NEWS. Fitch Ratings has assigned Country Garden Holdings Co. Ltd.'s (BB+/Positive) USD900m 7.5% senior notes due 2020 a final rating of 'BB+'.

The notes are rated at the same level as Country Garden's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 26 February 2015.

The Chinese homebuilder's ratings are supported by its strong execution track record and its consistent financial policy. Positive development in Country Garden's progression towards becoming a nationwide homebuilder will be an important rating driver, though such a process may take two years to reach fruition if the company continues on its current trajectory. The company is also facing a period of transition in its product mix.

KEY RATING DRIVERS

Better Financial Discipline: Country Garden's contracted sales in 2014 increased 21% to CNY128bn, after growth of 123% in 2013. The company has kept a consistent financial policy even as it grew strongly over the past two years. Its leverage (measured by net debt to adjusted inventory) fell to 30% as of end-1H14, including the HKD3.2bn proceeds from a rights issue; after increasing to 34% in 2013 from 31% a year earlier. Country Garden has also further diversified its financing sources by arranging a club loan in December 2014 in its efforts to lower its financing expenses.

Niche Market: Country Garden's business strength lies in targeting upgraders or the upper- and mid-income level homebuyers who can afford spacious landed housing in locations away from cities. Such locations bring about two important benefits - lower land costs that allow for a low average selling price (CNY6,680 per square metre in 2014), and buyers are less affected by the home purchase restrictions imposed in the major cities.

Increasing Diversification Lowers Risks: Country Garden is in the process of becoming a nationwide homebuilder. As of end-1H14, the developer had expanded into 22 out of China's 31 provinces and municipalities, compared with only 11 as recently as 2010 when 61% of its 84 projects were in its home-province of Guangdong. The proportion of contracted sales from Guangdong fell to 33% in 1H14, from 44% in 2013 and over 60% before 2013. This transformation has significantly reduced the company's market-specific risks.

Stable Metrics, Moderate Leverage: Country Garden's rapid expansion has been supported by a high asset turnover rate, allowing it to avoid the large debt build-up seen in many rapidly growing homebuilders. Its ratio of contracted sales to gross debt averaged 1.5x in the past four years, and was 1.9x in 1H14, the same as at end-2013. Land purchase expenditures have been restricted to within 30% of sales. Country Garden's leverage fluctuated in a narrow range of 31% to 35% in the past four years.

Product-Mix Transition: Country Garden has turned towards developing more high-rise homes. While this has not resulted in a lengthening of its project turnover rate, Fitch expects profit margin to come under pressure. Almost three quarters of Country Garden's 1H14 contracted sales were derived from high-rise buildings, although the company continued to sell to wealthy individuals and upgraders. Only 16% of its residential properties sold in 1H14 were below 90 sqm, the segment that first-time homebuyers gravitate towards. The Chinese government's increased emphasis on enhancing land use has resulted in fewer large plots being released for landed-housing development, the company's core product.

Expansion Abroad, Resources Strain: Country Garden also ventured into overseas markets with projects in Malaysia and Australia. The risks in these new markets are high, even if the projects produce significant opportunities in the future. Such rapid expansion is putting a strain on the company's resources, which is mitigated by its execution strength. The overseas expansion is still relatively small compared with Country Garden's operations in China; in 1H14, overseas contracted sales accounted for around 3% of total contracted sales.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by gross floor area to increase by 8% over 2015-2017;
- Average selling price for contracted sales to increase by 3% for 2015-2017;
- Fitch estimates the EBITDA margin at around 18%-22% in 2015-2017

RATING SENSITIVITIES
Positive: Future developments that may individually or collectively, lead to positive rating action include:
- Maintaining the ratio of net debt to net adjusted inventory below 35% on a sustained basis,
- Maintaining the ratio of contracted sales to gross debt above 2.0x on a sustainable basis;
- Sustaining trend towards becoming a larger nationwide player.

Negative: Future developments that may individually or collectively, lead to negative rating action include:
- Failing to maintain the positive guidelines will lead to the Outlook reverting to Stable