OREANDA-NEWS. Fitch Ratings says that Sunac China Holdings Limited's (BB-/Positive) plan to acquire seven property projects in Chengdu, China for CNY3.2bn will not immediately affect its rating. The expansion would enhance Sunac's presence in south-western China, but the key risk of this move is the fierce competition in the Chengdu property market.

Sunac's rating is supported by the homebuilder's sound financial profile and low leverage. The company's leverage, measured by net debt/adjusted inventory, was just 25% at end-2014, and the decision to terminate the purchase of a stake in Kaisa Group Holdings Limited would leave room for other acquisitions. The proposed Chengdu purchases, announced on 24 July 2015, will raise leverage, but it should still remain well under 40%, the level at which Fitch would consider negative rating action. The CNY9bn increase in Sunac's total cash position to CNY25bn at end-2014 also supports its acquisition plans.

Sunac could achieve economies of scale with the expansion in Chengdu because it already has an established presence in Chongqing, another major city in south-western China where it chalked up CNY10bn in contracted sales in 2014. Sunac plans to use its team in Chongqing to run the Chengdu projects to lower the administration costs in the region.

Fitch believes the key risk in this move is the performance of the Chengdu residential property market. Of the seven projects Sunac plans to acquire, five are residential projects. Chengdu's residential property market was sluggish in 2014, with prices falling by more than 6% on average. Looking ahead, the lower interest rates and the gradual relaxation of home purchase restrictions could have positive impact on the market, but Fitch believes prices in the city are not likely to improve significantly in the next 12 month given the fierce competition and the large stock of projects available for sale. Furthermore, most of the floor area that Sunac is acquiring is located outside the 3rd Ring of Chengdu, and not at the city centre, which raises challenges in achieving fast sales and quick turnover.