OREANDA-NEWS. March 24, 2015. Fitch Ratings says Sino-Ocean Land Holdings Limited's 2014 full-year results are in line with expectations, but the company's aggressive land acquisitions could weigh on its rating if it fails to achieve a corresponding contracted sales increase.

Sino-Ocean Land's contracted sales in 2014 increased 12% to CNY40.1bn, which is slightly lower than the growth of 15% in 2013. Its 2014 contracted sales by gross floor area (GFA) rose 12% to 2.93m sqm, while the average selling price remained flat at CNY13,700 per sqm.

Fitch considers the company's land acquisitions strategy as aggressive. Contracted sales were weak in first nine months of 2014, but Sino-Ocean Land still acquired 13 pieces of land. From January 2014 to February 2015, it acquired 20 land pieces at a total cost of RMB21.1bn. For the projects acquired in 2014, the company should start presales in 2015. However, Sino-Ocean Land's rating will be under pressure if it fails to deliver significantly higher contracted sales in 2015. Fitch expects the company to become cautious on land acquisitions in 2015-2016.

Sino-Ocean Land's leverage has been higher than other BB rated peers and has significantly increased in order to fund its land acquisitions. The company has issued two USD bonds of USD1.2bn each - the first one in July 2014 and the other one in January 2015. Fitch estimated the total debt including the perpetual has increased by CNY17.8bn to around CNY55.6bn in February 2015. Sino-Ocean Land's leverage, as measured by net debt/adjusted inventory, has increased from 37.5% at end-December 2013 to 44.7% at end-June 2014 and 54.0% at end-December 2014. Fitch expects the ratios to drop to around 48-50% at end-2015, as new project constructions are underway in 2015. Nevertheless, the current leverage is high for its rating. If the leverage is sustained, it will pressure the company's ratings.

EBITDA margin has dropped to 20.4% in 2014 from 23.2% in 2013 due to discounts on ASP and lower margins of contracted sales in 2014. Churn remains moderate and its total contracted sales to total debt was at 0.83x in 2014 and 0.95x in 2013. Fitch expects EBITDA margins to remain around 20%-22%, and contracted sales to total debt to improve to around 0.9-1.0x in next 6-12 months.

In addition, Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2015-2016. At Dec 2014, Sino-Ocean Land had CNY13.3bn of cash and CNY3.0bn of restricted cash (June 2014: CNY11.8bn of cash and CNY4.9bn of restricted cash). It also had CNY51.6bn of unused committed bank credit facilities at Dec 2014.

For a more detailed analysis of the rating drivers and sensitivities for Sino-Ocean Land, please refer to the rating action commentary "Fitch Rates Sino-Ocean Land's USD Notes Final 'BBB-', dated 4 February 2015 and available at www.fitchratings.com.