OREANDA-NEWS. Fitch Ratings has affirmed China-based Poly Real Estate Group Company Limited's (Poly) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'BBB+'. The Outlook is Stable.

Fitch has also affirmed the 'BBB+' rating on the USD1bn senior unsecured notes issued by Poly Real Estate Finance Ltd. The notes are unconditionally and irrevocably guaranteed by Hengli (Hong Kong) Real Estate Limited (Hengli), a wholly owned subsidiary of Poly, and they benefit from a keepwell agreement provided by Poly.

Poly's ratings benefit from a one-notch uplift due to the strong linkage with its parent China Poly Group Corporation (China Poly), in line with Fitch's Parent and Subsidiary Linkage criteria. Fitch has maintained the Outlook on Poly's standalone 'BBB' rating at Negative due to the company's high leverage. The Negative Outlook on the standalone rating does not affect Poly's IDR and Outlook as the uplift for parental support will increase to two notches if the standalone rating is downgraded to 'BBB-'.

KEY RATING DRIVERS
Improving Financial Strength: Fitch expects Poly's leverage, as measured by net debt/adjusted inventory, to fall below 45% from 2016, extending the decline from 49.7% in 1H15 and 52.5% in 1H14. Poly has followed through with its commitment to deleverage by slowing land acquisitions, and it boosted contracted sales and the cash collection rate in 2015 as property demand recovered. The cash collection rate rose to 97.7% in 3Q15 from 86% in 2014 amid a favourable environment for mortgage loans. Fitch expects the cash collection rate to stabilise at 90%. Fitch's expectation that market conditions will continue to improve in 2016 is likely to support Poly's sales growth and continued deleveraging.

Faster Expansion May Pressure Rating: Fitch has maintained the Negative Outlook on Poly's standalone rating as a return to a faster pace of expansion will reverse Poly's deleveraging trend. Poly's contracted sales have risen at a slower pace and it has aggressively added land in Tier 1 and 2 cities in 4Q15, acquiring three times the gross floor area that it did in 3Q15. A continuation of this pace of land acquisition, which is not part of Fitch's rating case, will result in rising leverage, particularly as we expect contracted sales growth to slow, and not keep pace with acquisitions.

Slower Sales, Lower Margin: Fitch expects Poly's growth in contracted sales to decelerate due to more intense competition and a larger base. The three-year compound annual growth rate (CAGR) for contracted sales is likely to be 5%-10% in the next two to three years. Poly's three-year CAGR for contracted sales slowed to 23.1% in 2014 and is likely to reach 12.8% in 2015 after hitting 33%-73% from 2007 to 2012.

We expect margin to be stable in 2015-2016, as high-margin projects sold in 2013-2014 are recognised. However, fierce competition from peers in Tier 1 and 2 cities will limit gains in average selling price and Poly's rising land cost will put pressure on margins from 2017. Average new-land acquisition cost increased 30% to CNY4,524 per square metre (psm) in first nine months 2015 from CNY3,485 psm in 2014.

Parental Support for Ratings: Poly's ratings benefit from its strong operational and strategic linkage with its parent China Poly. China Poly provides significant continued funding support to Poly, including providing a keepwell deed for Poly's offshore debt issues. Poly is a core subsidiary of China Poly as its strong growth makes the latter the largest homebuilder among the 16 enterprises wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council. The parental support, however, does not raise Poly's ratings above the 'BBB+' level - which is the highest in China's homebuilding industry - as it is not sufficient to offset industry risk

Leading Chinese Homebuilder: Poly is one of China's top three homebuilders by contracted sales value. Poly's market share increased to 1.8% at end-2014 from 1.2% at end-2011. Its operation is sufficiently diversified across 57 cities, with over 95% of its sales from Tier 1 and 2 cities in 2014. Its large scale gives it strong operational and financial flexibility.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by GFA to increase by 5%-10% over 2015-2017;
- Average selling price for contracted sales to increase by 0%-2% for 2015-2017;
- EBITDA margin of around 25%-30% in 2015-2017

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action on Poly's ratings include:
- Weakened linkage with China Poly due to government policy changes or a change in group strategy
Future developments that may, individually or collectively, lead to negative rating action for Poly's standalone ratings include:
- Net debt/adjusted inventory sustained above 45% by 2016
- EBITDA margin below 20% on a sustained basis

Positive:
No positive rating action is likely as the rating is at the highest for the Chinese property development industry. The standalone ratings are on Negative Outlook, indicating Fitch does not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, if the above factors do not materialise, then the Outlook of its standalone ratings may revert to Stable.

LIQUIDITY
Ample Sources of Liquidity: Poly had CNY38.7bn in cash (CNY656m in restricted cash) and access to CNY180bn of undrawn committed bank facilities at end-1H15. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2015-2017 due to its diversified funding channels and flexible land acquisition strategy. Poly's funding cost fell to 5.45% at end-September 2015 from 6.50% at end-2014 due to the interest rate cuts in China and issuance of low-cost medium-term notes in onshore debt markets.

FULL LIST OF RATING ACTIONS

Poly Real Estate Group Company Limited
Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB+'; Outlook Stable
Foreign-currency senior unsecured rating affirmed at 'BBB+'

Poly Real Estate Finance Ltd
Rating on USD500m 4.50% senior unsecured bond due 2018 affirmed at 'BBB+'
Rating on USD500m 5.25% senior unsecured bond due 2019 affirmed at 'BBB+'.