OREANDA-NEWS. Fitch Ratings has affirmed China Overseas Grand Oceans Group Ltd's (COGO) Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed COGO's foreign-currency senior unsecured rating and China Overseas Grand Oceans Finance II (Cayman) Limited's foreign-currency senior unsecured rating at 'BBB'

COGO's rating is based on a top-down approach; it is one notch down from its parent China Overseas Land & Investment Limited (COLI; BBB+). The standalone profile of COGO is in the 'BB' rating category - it is limited by its relatively small scale, short track record of around three years in Tier 3 cities and weaker margins reflecting the low average selling price (ASP) in Tier 3 cities. The affirmation reflects a continued linkage between COGO and COLI in terms of strategy, operations and ownership.

KEY RATING DRIVERS

Benefits and Support from Parent: COLI, one of the largest and most profitable homebuilders in China, is the major shareholder of COGO with a 37.98% stake. COLI focuses on Tier 1 and 2 cities whereas COGO focuses on Tier 3 cities. COGO is of long-term strategic importance to COLI as it is the only entity through which the group is expanding in Tier 3 cities. The two companies are integrated, sharing senior and operational management as well as brand names, market intelligence and management systems.

Weaker Contracted Sales from Tier 3 Cities: Despite weak market conditions in China, especially in certain Tier 3 cities, where there was over supply, COGO still managed to post a 5% increase in contracted sales in 2014 to HKD18bn. Its 2014 contracted sales by gross floor area (GFA) rose 13% to 1.85m sqm, but the average selling price fell 7% to HKD9,763 per sqm. COGO focuses on Tier 3 cities that are regional or provincial economic centres or cities that benefit from increased urbanisation of Tier 1 or 2 cities. These cities can support higher selling prices compared with lesser Tier 3 cities. COGO's strategy is to achieve a top-three market share in all the cities in which it does business, which would give it stronger pricing power and market influence.

Slower Land Acquisitions: In 2014, COGO only acquired four land pieces in January and February. This added around 2.7m sqm of attributable GFA to COGO's land bank at a cost of CNY4.2bn in total. This is only half of its acquisitions in 2013, when it acquired 13 pieces of land with 4.6m sqm attributable GFA for CNY8.8bn. Fitch views this as a positive move, as the management is sensible and cautious about land acquisitions during weakness in the market, particularly in Tier 3 cities. Fitch expects the company to continue to be careful in land acquisitions in 2015-2016.

Capital Structure Continues to Improve: COGO's funding costs decreased to 4.21% in December 2014 from 5.66% in December 2010. With the help of its parent, COGO has established strategic partnerships with major commercial banks that ensure COGO will have access to sufficient credit facilities. COGO also coordinates with COLI on its treasury functions and shares both domestic and offshore banking relationships with COLI.

'BB' Financial Metrics: COGO's financial metrics remain sufficient for its standalone 'BB' credit profile. As of December 2014, its ratio of net debt to net adjusted inventory was at 42%, the ratio of contracted sales to total debt at 1x and EBITDA margin at 19%. This is due to limited contribution from projects in Beijing and Guangzhou. COGO's liquidity remains strong - it had HKD8.8bn cash, HKD2.6bn restricted cash and HKD2.3bn unused committed bank credit facilities as at end-2014 compared with short term debt of HKD6.0bn.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by gross floor area to increase by 0%-8% over 2015-2017;
- Average selling price for contracted sales to increase by 0%-2% for 2015-2017;
- EBITDA margin of around 23%-26% in 2015-2017

RATING SENSITIVITIES

Positive rating action is unlikely without evidence of stronger contractual linkage between COLI and COGO.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Weakening of strategic, operational or ownership linkages between COLI and COGO
- Lack of support from COLI in the event of sustained weakening of COGO's operational, financial and liquidity positions
- Negative rating action on COLI.