OREANDA-NEWS. Fitch Ratings has affirmed China-based Future Land Development Holdings Limited's (Future Land) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B+'. The Outlook is Stable. The agency has also affirmed the company's senior unsecured rating at 'B+' and recovery rating at 'RR4'.

The affirmation is supported by Future Land's fast asset-turnover strategy targeting middle-class home buyers and strong market position in the Yangtze River Delta, which has reached critical mass. Significant minority interests in its key subsidiary, the 58.8%-owned Jiangsu Future Land (JFL), that restrict Future Land's access to its cash flows; weaker deconsolidated financial metrics (after excluding JFL); and limited geographical diversification remain key constraints on Future Land's ratings.

KEY RATING DRIVERS

Expansion Will Not Pressure Rating: Future Land's net debt / adjusted inventory was stable at 25% at end-2014 (end-2013: 23%) as the company maintained strong sales efficiency and reduced its funding requirement by increasing equity partnerships for JFL's residential development projects. The company plans to rapidly expand its non-JFL subsidiaries, which it calls the non-B share segment, over the next 12-18 months. This would likely result in Future Land's leverage rising to around 35%-40%, which is still in line with its rating level.

Mild Margin Improvement Expected: Future Land's EBITDA margin reduced to 12.7% in 2014 from 17.3% in 2013 due to higher land costs as well as lower selling prices. Excluding the provision for inventory impairment, the company's EBITDA margin was 14.5% in 2014. Fitch expects Future Land's EBITDA margin to stay around the mid-teens in 2015 with limited growth in selling prices due to weaker market conditions. Significant EBITDA margin improvement would more likely be driven by a higher proportion of sales from mixed development projects that include higher-margin commercial properties, but this would only take place when the non-B share segment expands and benefits from economies of scale.

Weaker Deconsolidated Financial Metrics: Cash flow contribution from the non-B share segment has been minimal because its scale is still small. In Fitch's analysis, after deconsolidating JFL from Future Land given restrictions on access to the former's cash flow, the non-B share segment's contracted sales reached CNY5.7bn in 2014 (2013: CNY3.5bn) and its net debt/adjusted inventory was 36% (2013: 36%), which are both weaker than JFL's. With Future Land's plan to increase its land bank for the non-B share segment for mixed development projects that have longer cash cycles, Fitch expects the deconsolidated leverage to peak at around 60%. The non-B share segment's weaker credit metrics compared with JFL's during this period also means structural subordination would likely persist over the medium-term as JFL remains the key contributor to Future Land's performance.

Strong Position in Yangtze River Delta: Future Land is one of the largest homebuilders in the Yangtze River Delta, with more than 90% of its CNY23.1bn in contracted sales (excluding sales from associates and joint ventures) in 2014 (2013: CNY20.6bn) from this region. The company had 11.2 million square metres of attributable land bank as at end-2014. Its business profile is supported by its fast asset-turnover strategy, as measured by the contracted sales/total debt ratio of 1.7x at end-2014, a level that is better than its peers. The concentration in the Yangtze River Delta, however, leaves it vulnerable to local policy and economic changes. Future Land is in the early stages of diversifying its sales base - it has acquired land outside the Yangtze River Delta in recent years for mixed developments - but its track record of sales in mixed development projects, particularly outside the region, is still limited.

Significant Structural Subordination: Future Land's rating is constrained by structural subordination stemming from the presence of significant minority interests in JFL, which restricts Future Land's access to cash flows from JFL. In 2014, JFL accounted for over 75% of Future Land's CNY23bn in contracted sales (2013: over 80%) and Fitch estimates the subsidiary had net debt/adjusted inventory of 17% at end-2014. JFL, which undertakes high-churn pure residential projects, accounted for 63% of Future Land's land bank as at end-2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales growth averaging in the mid-teens.
- New land acquisitions averaging 40% of annual contracted sales.
- No significant improvement in gross margins with Future Land keeping to its mass-market focus and high asset-turnover strategy.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant decrease in the company's contracted sales, excluding JFL, in 2015
- A significant decrease in the contracted sales/ total debt ratio to below 1.0x at the holding company level on a sustained basis (0.7x at end-2014)
- Consolidated net debt/ adjusted inventory rising above 45% on a sustained basis
- EBITDA margin sustained below 15%

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A substantial increase in the scale of the company's business, excluding JFL, with annual contracted sales exceeding CNY10bn
- Unrestricted access to JFL's cash flows
- EBITDA margin sustained above 20%