OREANDA-NEWS. June 30, 2015. Fitch Ratings has affirmed homebuilder Franshion Properties (China) Limited's (Franshion) Long-Term Foreign-Currency IDR and senior unsecured rating at 'BBB-'. The Outlook is Stable. The agency has also affirmed Franshion Brillant Limited's bonds at BBB-.

The affirmation reflects Franshion's continuous strong contracted sales growth and high margins of property and land development. Although the margins of hotel and investment property (IP) business contracted in 2015 due to one-off pre-opening and listing expenses, Franshion still has one of the strongest IP portfolios in China.

KEY RATING DRIVERS

Strong Property and Land Development: Franshion's sales from property development rose 27% to CNY18.5bn in 2014, significantly ramping up its business scale. The company also recorded a strong gross profit margin of 46% in its land development at Meixi Lake in Changsha, the capital of Hunan province. The unsold primary land amounted to 20,847,000 sqm and would sustain more than 10 years development to complement the core property development sales. Fitch believes Franshion will continue to actively develop property and land to achieve sales growth of around 20% in 2015.

Weaker Recurring EBITDA Temporary: The overall growth of recurring income has slowed down due to the weak 3.2% increase in hotel business in 2014, even though rentals from IP still rose 12%. Meanwhile, EBITDA margins of hotel decreased to 23.4% in 2014 from 39.8% a year ago while the IP segment margin still held relatively well. Lower margins were mainly due to escalated one off pre-opening expenses of three hotels and listing expenses. In the 1H15, there is improvement in occupancy and average daily rate at the three newly opened hotels. Hyatt Regency Chongming and Renaissance Beijing are expected to generate positive operating cash flow by the end of 2015. As the scale of investment properties and hotels in operation increases, Fitch expects the recurring EBITDA to interest coverage to improve to 0.6x in 2015 from 0.4x in 2014 on a deconsolidated basis.

Increased Leverage to Moderate: Franshion's net debt/adjusted inventory including IP increased slightly to 39% at end-2014 from 34% at end-2013. The net leverage ratio is not expected to increase, given strong contracted sales performance, sufficient liquidity, and estimated capex for future development. Its strong relationship with domestic banks and diversified funding sources also keep Franshion's financial management flexible.

Advantage in Government Links: Franshion's business continues to be supported by its status as a state-owned property company. This provides the company with an advantage in government-led strategic projects, and helps provide strong access to domestic bank funding. This is illustrated by the favourable locations of its investment properties and commercial development projects.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- contracted sales (including primary land sales) to reach RMB25bn in 2015, RMB30bn in 2016 and growth at low to mid teens
- Gross profit margin of both property development and development stays at 40%
- IP and hotel revenue enjoys single digit growth and EBITDA margin at 40%

RATING SENSITIVITIES

The following ratios and numbers apply to Franshion after the deconsolidation of Jinmao Investment Holdings (JI), unless specified.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Net debt/adjusted inventory including investment property remaining above 35% on a sustained basis
-Substantial decrease in margin and total sales in property development and land development from 2014
-(Recurrent EBITDA + dividends from JI)/gross interest expense ratio falling below 0.5x on a sustained basis
-Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group's equity stake in Franshion to under 51% (53.98% as at end-June 2015), or a shift from strategic projects due to weakened relationships with local governments
-Reduced access to onshore bank loans or inter-company funding support

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-maintaining (recurrent EBITDA + dividends from JI)/gross interest expense above 1.5x with similar scale and healthy leverage in property development on a sustained basis, or
-contracted sales from project development and land development over CNY35bn with strong margin on a sustained basis, while keeping healthy leverage and (recurrent EBITDA + dividends from JI)/gross interest expense ratio over 1.0x