OREANDA-NEWS. Fitch Ratings says Franshion Properties (China) Limited's (Franshion; BBB-/Stable) profit warning for its 1H15 results has no impact on its ratings. The company warned on 23 July 2015 that it expects a significant drop in profit from a year earlier due to the lower number of sale properties that were delivered and settled in 1H15.

Fitch does not consider the timing of accounting profit recognition, upon project delivery, as an important factor in our ratings for Chinese homebuilders because almost all project cash flows would have occurred before the properties are delivered. We track contracted sales instead because it is a more timely measure. Franshion said in its profit warning announcement that contracted sales rose to CNY10.2bn in 1H15 from CNY7.7bn in 1H14, reflecting improving operations.

Franshion's expected drop in profit was also likely due to the zero land sales in 1H15 at the Changsha Meixi Lake site, which was a major contributor to the company's sales in 2014. Monthly sales data from Franshion showed that land sales at Meixi Lake contributed CNY1.3bn to total sales in February 2014 and CNY1.7bn in December 2014. In 2H15, Franshion could generate primary land sales from both the Meixi Lake site and another project in Nanjing to meet its primary land sales target of CNY3bn for 2015.

Changsha Meixi Lake is located in Hunan province's Xiangjiang new area, which was set up as a state-level strategic development zone, a feature that would provide long-term support to land prices in the area. The recent increase in secondary home transaction volume in Changsha is likely to support the city's primary land market in 2H15, and this may help Franshion generate growth in sales of land at the Meixi Lake site.

Fitch believes Franshion is on track to achieve its full-year 2015 contracted sales target of CNY24.8bn (2014: CNY18.5bn). Franshion's net leverage ratio, measured by net debt/adjusted inventory, is not expected to increase thanks to strong contracted sales performance and sufficient liquidity. The company's business continues to be supported by its status as a state-owned property company.