OREANDA-NEWS. Fitch Ratings has assigned China-based property developer Oceanwide Holdings Co. Ltd.'s (Oceanwide; B/Stable) proposed US dollar senior notes a 'B(EXP)' expected rating and a recovery rating of 'RR4'.

The notes are issued by Oceanwide Holdings International 2015 Co., Limited, a wholly owned subsidiary of Oceanwide. The notes, guaranteed by Oceanwide, are rated at the same level as Oceanwide's senior unsecured rating because they represent direct and senior unsecured obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received.

Oceanwide intends to use the proceeds from the issuance for overseas general corporate purposes, including, but not limited to, the development of the First & Mission Project located in San Francisco in the United States.

Oceanwide's rating is supported by its sales performance, which is on track to meet its CNY12bn contracted sales target in 2015, and Fitch's expectation that it will generate positive cash flow from operations from 2016. The rating is constrained by the rapid increase in net debt to CNY35bn in 2014 from CNY22bn in 2013, which is likely to continue in 2015 as the company ramps up development expenditure to support sales growth.

KEY RATING DRIVERS
Heavy Expenditure to Continue: Fitch expects Oceanwide's net debt to increase in 2015 and peak in 2016 as it builds up its investment property portfolio. Development expenditure is also likely to remain high due to increased construction costs for projects in Beijing that began selling from 2015, accelerated project launches in Beijing, and the 50% share of commercial property projects in Oceanwide's land bank, which are only sold when the properties are near to completion. The company's investments in its finance businesses will also add to its leverage.

Asset Acquisitions: Oceanwide is diversifying its business model from pure property development to financial institutions in the long term. It spent over CNY5bn to acquire Minsheng Securities Co., Ltd from China Oceanwide, and invested in China Minsheng Trust Co., Ltd and China Minsheng Investment Corp., Ltd. It also plans to acquire Minan Property & Casualty Insurance Co., Ltd for CNY1.8bn. The parent has provided a keepwell deed to ensure that Oceanwide has sufficient liquidity. China Oceanwide has significant financial assets that allow it to provide liquidity support to Oceanwide if needed.

Property Concentration Risk: The projects in Wuhan and Beijing have over 8 million and 2 million sqm of gross floor area (GFA) respectively. Together, they account for over 80% of Oceanwide's total land bank and estimated contracted sales in 2015-2017. In Wuhan, there is a risk that housing demand and development in the city may not keep pace with the substantial housing supply from Oceanwide's projects, which could lower sales efficiency and hurt its liquidity.

The risk is mitigated by the Beijing projects, which will match Wuhan in sales value from 2015. The Beijing projects are located in the central business district and had low land costs.

Strong Sales Momentum Maintained: Fitch expects the company's contracted sales to continue to increase strongly (2014: CNY9.8bn, up 67%) due to accelerated inventory launch in Wuhan and substantial sales from new premium projects in Beijing. Oceanwide's CFO may turn positive from 2016 because of robust sales, strong profitability and low land replenishment. We expect the company to maintain EBITDA margin of close to 40% (2014: 43%) despite some dilution from the high per sqm development cost of its Beijing projects.

Ratios Used Reflect Transformation: Fitch measures Oceanwide's financial soundness based on its CFO and its inventory turnover (ratio of contracted sales to net inventory). Oceanwide's inventory turnover was 0.28x in 2014 but we expect this to exceed 0.5x from 2016 as sales from its large pool of properties under development increase while land replenishment remains minimal. The improved inventory turnover and likely generation of positive CFO will provide Oceanwide with funds to expand its financial businesses.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Limited new land acquisitions at 0.1x-0.4x of contracted sales GFA
- Contracted sales growth mainly driven by growth in average selling prices from CNY24,000/sqm to CNY34,000/sqm in 2015-2018
- Property development gross margin of 50%-53% in 2015-2018 (lower than in previous years due to higher construction cost)
- Lower dividend pay-out ratio than in previous years

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to achieve positive operating cash flow in 2016
- EBITDA margin sustained below 35%
- Contracted sales/net inventory sustained below 0.5x
- Substantial weakening of Minsheng Securities' credit profile

Positive: Positive rating action is not expected in the next 12-18 months due to Oceanwide's high leverage.