OREANDA-NEWS. Fitch Ratings has affirmed China-based Redco Properties Group Ltd's (Redco) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with Stable Outlook. The agency has also affirmed Redco's senior unsecured ratings and its USD125m 13.75% senior notes due 2019 at 'B' with Recovery Ratings of RR4.

Redco's ratings are affirmed as its financial profile remains stable, and its leverage as measured by net debt/adjusted inventory of 29% at end-2014 remains low compared with the 40% average of companies rated at the same level. However, its small business scale and low land-bank quality continue to constrain its ratings.

KEY RATING DRIVERS
Limited Business Scale: Redco has a land bank of four million square metres (sq m) at end-2014 with 17 projects in its pipeline in seven cities, and achieved contracted sales of CNY3.2bn in 2014. It does not have a significant presence in any of the cities except Nanchang, where it has eight well-developed projects. The company's scale is the smallest among rated peers in the 'B' category, but has enough land bank to support sales expansion.

Projects Mostly In Secondary Locations: Redco's projects remain mostly in secondary locations (except Nanchang and Jinan), and its low average selling price (ASP) of CNY6,706/sqm in 2014 indicates sales contributed by better-located projects remain insignificant. Its Shenzhen project will support an ASP increase when the project starts selling in 2015/2016. The company has continued to pursue projects in Shenzhen due to its intention to participate in the city's urban renewal.

Sufficient Liquidity to Repay Debt: Redco had cash and cash equivalents of CNY951m (excluding restricted cash of CNY355m). The company has also raised USD75m in syndicated loan in March 2015 to improve its liquidity position. We believe that this is sufficient to cover the company's short-term debt of CNY538m.

KEY ASSUMPTIONS
- GFA sold maintains double-digit growth from 2015 - 2017
- Price increase reflecting more sales generated in higher tier cities; same project ASP remains flat
- In 2015-2016, GFA of new land acquired at 130% of GFA sold, land cost comparable to 2014 level
- Cost appreciation of 3% per annum

RATING SENSITIVITIES
Positive: Future developments that may collectively lead to positive rating actions include:
- Annual contracted sales sustained above CNY8bn (2014: CNY3.2bn) without compromising leverage, and
- EBITDA margin sustained above 20% (2014: 21%), and
- Contracted sales/total debt sustained above 1.3x (2014: 1.2x).

Negative: Factors that may, individually and collectively, lead to negative rating action include:
- Net debt/ adjusted inventory sustained above 50% (end-2014: 29%), or
- EBITDA margin sustained below 15%, or
- Contracted sales/total debt sustained below 1.0x.