OREANDA-NEWS. Fitch Ratings has assigned China Overseas Land International (Cayman) Limited's proposed euro-denominated senior unsecured notes an expected 'BBB+(EXP)' rating . The notes will be unconditionally and irrevocably guaranteed by China Overseas Land & Investment Limited (COLI; BBB+/Stable). China Overseas Land International (Cayman) Limited is a direct wholly owned subsidiary of COLI.

The notes are rated at the same level as COLI's senior unsecured rating because they constitute direct, unsubordinated and senior unsecured obligations of the company under the guarantee. The final rating on the euro notes is contingent on the receipt of final documents conforming to information already received.

COLI's ratings are supported by its satisfactory contracted sales of HKD140.81bn in 2014 and its ability to maintain a strong EBITDA margin of 31% despite the challenging market conditions. COLI has continued to maintain its leadership position, strong execution track record and consistent financial policy.

KEY RATINGS DRIVERS

Leading Homebuilder: COLI has been one of the top homebuilders in China since it started operations in 1984. It has consistently generated high profit margins - EBITDA margin of 30% in 2013 and 31% in 2014 - that reflect its premium prices and effective cost management. Its strong brand is supported by its nationwide presence and focus on first-time homebuyers and "upgraders" who seek better homes than their existing residences.

Slower Contracted Sales; Slower Land Acquisitions: COLI met its contracted sales target for 2014 and delivered HKD140.81bn in contracted sales. Given the poor market conditions in 2014, COLI slowed down its land bank acquisitions. During 2014, it acquired 17 pieces of land with total attributable GFA of 8.6m sqm at a land premium of CNY38.3bn, compared with 24 pieces of land with total attributable GFA of 11.7m sqm for CNY42.6bn in 2013. The total attributable GFA acquired in 2014 is 26.5% less and land premium is 10% less than in 2013.

Additional Land via Asset Injection: COLI added 10.9m sqm of GFA on 7 May 2015 via an asset injection from China State Construction Engineering Corporation (CSCECL) at a total consideration of HKD42.8bn. COLI will use the proceeds from a share sale to its parent China Overseas Holdings Limited - completed on 20 May 2015 - to pay for the injection. This transaction provides high-quality land in Tier 1 and 2 cities and increases COLI's land bank by 29.1% to around 48.3m sqm. The injected assets as a whole are in a net cash position with cash and bank balances exceeding their external borrowings.

Well-Established Track Record: COLI has established itself as a nationwide homebuilder with operations around the Pearl River Delta, Yangtze River Delta, Bohai Rim, and the northern and western regions. It has displayed resilience through several industry downturns during its 30-year operating history, with high profitability relative to its peers and broad funding diversity. COLI will continue to use its brand reputation, and focus on first-time homebuyers and upgraders who demand better quality at affordable prices. We expect this strategy to help COLI to maintain its profitability in medium term.

Diversified Funding Enhances Liquidity: COLI also has one of the lowest borrowing costs among homebuilders. Its weighted average borrowing cost was at 4.3% in end-2014, compared with 3.7% in end-2013. Its low funding costs are the result of access to the offshore bond and loan markets, and its state-owned enterprise (SOE) status, which aids access to domestic funding. COLI continues to maintain a strong liquidity position and had HKD11.7bn in undrawn committed bank facilities and cash balance of HKD51.2bn at end-2014.

Outlook Stable: Fitch expects that COLI will maintain its leadership position in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders; leverage its operational and financial flexibility; and continue to grow at a moderate pace in the highly competitive and cyclical Chinese property market.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by gross floor area to increase by 0%-5% over 2015-2017;
- Average selling price for contracted sales to increase by 0%-5% for 2015-2017;
- EBITDA margin of around 25%-27% in 2015-2017

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Unfavourable changes to China's regulation or economy leading to a decline in contracted sales; or
-Decline in EBITDA margin to below 25% (2014: 31%); or
-Deterioration in net debt/adjusted inventory to above 30% over a sustained period (2014: 19%); or
- Contracted sales/ total debt remaining below 1.5x over a sustained period.
- Significant change from its current focus on first-time homebuyers and upgraders.

Positive: Positive rating action is not expected over the next 12 to 18 months due to the high cyclicality as well as the high regulatory risks in the Chinese property sector.