OREANDA-NEWS. Fitch Ratings has affirmed China Aoyuan Property Group Limited's (Aoyuan) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook has been revised to Positive from Stable. Fitch has also affirmed Aoyuan's senior unsecured rating and the ratings on its outstanding notes at 'B+' with Recovery Rating of 'RR4'

The Outlook revision reflects the increase in Aoyuan's sales even as it remained disciplined about land acquisition and maintained a consistent financial profile. The ratings are supported by its good execution track record but constrained by the quality of its land bank, in which sites in lower tier cities form more than one third of the total.

KEY RATING DRIVERS

Improving Operational Strength: Fitch estimates Aoyuan's contracted sales will reach CNY20bn in 2017, based on its plans for project launches. This makes Aoyuan's scale comparable with 'BB-' rated Chinese homebuilders. Fitch also estimates that the share of contracted sales from Guangdong, Aoyuan's home market, will continue decrease to less than 50% compared with 67% in 2014. Aoyuan's contracted sales in 2015 increased 24% to CNY15.2bn, which was almost triple the contracted sales in 2012. This is mainly because of it consistently increased the number of properties ready for sale. Its larger scale gives the company a more stable sales base and greater financial flexibility in making land acquisitions.

Disciplined Land Acquisition: Fitch expects Aoyuan to maintain its current pace of land acquisitions, and the land premium for 2016-2017 will not exceed CNY6bn a year, or less than a third of its estimated full-year contracted sales. Aoyuan has purchased land at a stable pace of CNY4bn-5bn a year in the last six years, even though its contracted sales increased significantly. Meanwhile, Aoyuan also reduced its exposure to commercial properties, which are more cyclical than residential properties. Fitch estimates commercial properties (including retail property) will account for about 30% of total contracted sales in 2015-2016 compared with 50% in 2014.

Stable Financial Profile: What sets Aoyuan apart from its fast-growing peers rated in the 'B' category is that it has maintained healthy leverage despite rapid expansion. Its leverage, as measured by net debt/adjusted inventory, was 31.3% at end-June 2015, and its sales efficiency - measured by contracted sales/total debt - remained above 1.0x in the past three years. Fitch expects Aoyuan will continue to maintain its fast-churn model and prudent land acquisition strategy; thus its financial profile will remain healthy in the next 18 months, which will support its credit profile.

Low-Tier City Exposure, Low ASP: Aoyuan's leadership in its core markets in Guangdong Province has supported steady growth in contracted sales, and provides a strong base for expansion into other cities. However, the contracted average selling price (ASP) is lower compared with peers' due to its higher exposure to lower-tier cities. Fitch estimates that more than a third of the company's total land bank is in Tier-3 cities. It is still not clear if Aoyuan will be able to secure sites in higher tier cities. However, the higher risks associated with exposure to Tier-3 cities are partly mitigated by its good execution ability and strategy of selecting sites in lower tier cities that can be easily accessed by people working in the big cities.

Healthy Liquidity: Aoyuan's current liquidity position is healthy and strong, which supports its planned expansion. Total cash was CNY6.7bn at end-June 2015, with an undrawn credit facility of CNY5.5bn, which exceeded its short term debt of CNY4.1bn. The company has also established diversified funding channels, including onshore and offshore capital markets, and successfully launched onshore corporate bonds in 2015, which reduced its funding cost.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Pace of land acquisitions to be stable in 2016-2017
- Contracted sales estimated based on properties available for sale in 2015, and the sell-through ratio, which Fitch estimates will reach close to CNY20bn by 2017.
- The company's average selling price for its contracted sales will be slightly lower in 2016-2017 due to product mix
- Company will maintain its fast churn and high cash-flow turnover business model

RATING SENSITIVITIES

Positive: Future developments that may individually or collectively, lead to positive rating action include:
- Continued expansion with contracted sales rising to more than CNY18bn a year
- EBITDA above 25% on a sustained basis
- Maintaining the ratio of net debt to adjusted inventory below 35% on a sustained basis
- Maintaining the ratio of contracted sales to gross debt above 1.0x on a sustained basis;
- No substantial increase of contracted sales contribution from retail properties.

Negative: Future developments that may individually or collectively, lead to negative rating action include:
- Failing to maintain the positive guidelines will lead to the Outlook reverting to Stable