OREANDA-NEWS. Fitch Ratings has affirmed China Overseas Grand Oceans Group Ltd's (COGO) Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed COGO's foreign-currency senior unsecured rating and China Overseas Grand Oceans Finance II (Cayman) Limited's foreign-currency senior unsecured rating at 'BBB'.

COGO's rating is based on a top-down approach; it is one notch down from the 'BBB+' standalone ratings of its parent China Overseas Land & Investment Limited (COLI; A-/Stable). COLI's 'A-' IDR includes a one-notch uplift, as Fitch believes that part of the strategic role that its ultimate parent China State Construction Engineering Corporation Ltd (CSCECL, A/Stable) plays in the field of housing construction is due to its ownership of COLI. COLI is CSCECL's major homebuilding platform. However, Fitch believes COGO is not a party actively undertaking this role due to COGO's limited scale and contribution to COLI, and will therefore not benefit from this uplift.

The standalone profile of COGO is in the 'BB' rating category. This is limited by its relatively small scale, and weaker margins - reflecting the lower average selling price (ASP) during ongoing inventory de-stocking progress in Tier 3 cities. The affirmation reflects a continued linkage between COGO and COLI in terms of strategy, operations and ownership.

KEY RATING DRIVERS
Benefits and Parental Support: COLI, one of the largest and most profitable homebuilders in China, is the major shareholder of COGO with a 37.98% stake. COLI focuses on Tier 1 and 2 cities whereas COGO focuses on Tier 3 cities. COGO is of long-term strategic importance to COLI as it is the only entity through which the group is expanding in Tier 3 cities. The two companies are integrated, sharing senior and operational management as well as brand names, market intelligence and management systems.

Limited Support from CSCECL: Fitch believes that COGO's limited scale and contribution to COLI means that COGO is not a direct participant of the strategic role that CSCECL plays in the field of housing construction due to its ownership of COLI. Therefore, Fitch does not believe the support from CSCECL will be extended to the COGO level. COGO only accounted for 12% of total contracted sales and 13% of COLI's total assets as of December 2015.

Improved Contracted Sales; Weaker Margins: COGO recorded a contracted sales value of HKD22bn in 2015, with a 22% yoy growth despite poor market conditions in Tier 3 cities. The company continued to focus on clearing inventory by lowering prices. ASP was down by 6% to HKD9,144/square metre (sq m) in 2015, and GFA was up 30% to 2.4 million sq m. Fitch viewed this as a cash-protection strategy, given the current poor market conditions in Tier 3 cities. The EBITDA margin, as a result, has been squeezed to around 10% from 18.7% in 2014.

Slower Land Acquisitions: COGO remained cautious in land acquisition in 2015. It only acquired four land pieces in December with a total land premium at CNY2.7bn, down 35% from CNY4.2bn in 2014 and was less than one-third of the CNY8.8bn in the peak year of 2013. This added around 1.6 million sq m of attributable GFA to COGO's land bank. The total attributable land bank was 10.2 million sq m, spread across 15 cities.

Leverage to Improve: Leverage, as measured by net debt/adjusted inventory, improved to 24% in 2015 from 32% in 2014, due to the stronger cash inflow from contracted sales and less outflow on land bank acquisition. The company is actively managing its debt position and would like to deleverage when possible.

'BB' Category Financial Metrics: COGO's financial metrics remain sufficient for its standalone 'BB' category credit profile. Its leverage was low at 24%, better than its 'BB' category rated peers, and the ratio of contracted sales to total debt was at 1.2x. The EBITDA margin was weak in 2015, putting pressure on its standalone credit profile. Fitch expects the EBITDA margin to stay at around the mid-teens in the next two to three years - given the continued clearing of inventory. Liquidity remains healthy - with HKD9.7bn in cash, HKD3.3bn in restricted cash and HKD1.9bn in unused committed bank credit facilities, compared with short-term debt of HKD4.9bn at end-2015.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by GFA to increase by 6% yoy over 2016-2018;
- ASP for contracted sales to recover at 3% yoy for 2016-2018;
- EBITDA margin stays at around the mid-teens in 2016-2018

RATING SENSITIVITIES
Positive rating action is unlikely without evidence of stronger contractual linkage between COLI and COGO.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Weakening of strategic, operational or ownership linkages between COLI and COGO
- Lack of support from COLI in the event of sustained weakening of COGO's operational, financial and liquidity positions
- Negative rating action on COLI.