OREANDA-NEWS. Fitch Ratings has affirmed China-based property developer CIFI Holdings (Group) Co. Ltd.'s (CIFI) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its senior unsecured ratings at 'BB-'. The Outlook on the IDR is Stable. The full list of rating actions can be viewed at the end of this commentary.

The ratings affirmation is supported mainly by the Chinese homebuilder's healthy contracted sales and EBITDA margin. Its increased participation in JV projects would not put signififcant pressure on cash flow, and the land bank expansion in 2015 has raised leverage but remained below our negative guideline.

KEY RATING DRIVERS
Manageable JV Impact on Cash Flow: Fitch expects CIFI's substantial increase in JV projects in 2015 to have just a manageable impact on operating cash flow, although it may delay the contracted sales cash flow back to the holding company by a few months. CIFI largely adopted the JV strategy in 2015 to reduce the burden on land premium and gain land bank in Tier 1 and Tier 2 cities, and over 70% of the land acquired was via the JV model. CIFI actively manages JV cash flow; and will extract the excess cash from the JV to the holding group company when the JV projects break even and achieve a surplus. This process may delay the cash return for two to three months, but would not tie up much cash over the longer term.

Landbank Expansion Raising Leverage: CIFI's land bank expansion in 2015 has raised leverage (measured by net debt/adjusted Inventory) from 34% in 2014 to 44% in 1H15, and Fitch expects leverage to remain above 40% by end-2015. We see lower leverage in 2016 in light of the quality of land acquired and that CIFI is considering a slowdown in land acquisition, and we believe the 2015 expansion will not constrain CIFI's rating in the long term. The company acquired gross floor area (GFA) of 1.8 million square metres on an attributable basis in January-November 2015, with total attributable land premium of CNY11bn. Almost all the land acquired was in Tier 1 and 2 cities, which explains CIFI's use of the JV structure in these projects - given the higher capital outlay needed.

Higher Cash Requirement Boosts Debt: CIFI's total debt increased by 70%, and was around CNY23.5bn by end-2015. This is due partly to the high land premium in 2015, and partly because CIFI maintained a higher cash level in the holding group company - from CNY7bn in 2014 to over CNY11bn by end-2015. Fitch thinks the increase in the holding company's total cash is essential for CIFI's current JV business model, and expects this to be sustained in order to enhance liquidity. We do not expect total debt to rise significantly in 2016 if the company reduces its pace of land acquisition.

The attributable contracted sales/total debt ratio has dropped from over 1x in 2014 to 0.8x by year-end 2015 due to the rise in debt. Fitch believes this ratio will recover from 2016 but remain below 1.0x. We think CIFI's liquidity would not be constrained in the next 12 months, as almost all new debt is long term.

Healthy Contracted Sales and EBITDA: Total contracted sales in January-November 2015 reached CNY25.3bn, representing 33% yoy growth, and attributable contracted sales consist of about 70% of total sales. The growth in attributable contracted sales is slower than the land bank expansion in 2015, and dragged down the turnover ratio (measured by attributable contracted sales/net inventory) to below 1.0x, although we expect this ratio to recover in 2016 if land purchases were to slow down. CIFI's EBITDA margin has remained healthy at 28%; we expect the full-year 2015 margin to be around 30% and to remain above 25% in 2016.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- No aggressive land acquisition in 2016 and 2017. All future land acquisitions are assumed to be 100%-owned by CIFI in forecasts
- Average land costs to rise in the cost of goods and services (COGS) due to limited land supply and fierce competition for land in target cities
- The company will diversify its land acquisition focus from Tier 1 to Tier 2 cities starting from 2016
- Contracted sales growth in the mid-teens on an attributable basis in 2016 and 2017
- Adjusted EBITDA margin to remain around 25% in 2016 and 2017.

RATING SENSITIVITIES
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Attributable contracted sales/total debt sustained below 0.8x
- Major decrease in attributable contracted sales scale from 2015, or the ratio of attributable contracted sales/net inventory falling below 1x on a sustained basis
- EBITDA margin declining to 15% or lower
- Net debt/adjusted net inventory rising towards 45% on a sustained basis.

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- Annual contracted sales rising above CNY30bn on an attributable basis, with a healthy financial profile and current product mix
- Maintaining high cash flow turnover despite the JV business model, and attributable contracted sales to total debt sustained at over 1.2x
- EBITDA margin over 20% on a sustained basis
- Leverage measured by net debt/adjusted inventory sustained below 35%.

FULL LIST OF RATING ACTIONS
Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Stable
Senior unsecured ratings affirmed at 'BB-'
USD500m 12.25% senior unsecured notes due 2018 affirmed at 'BB-'
USD400m 8.875% senior unsecured notes due 2019 affirmed at 'BB-'
USD400m 7.75% senior unsecured notes due 2020 affirmed at 'BB-'.