OREANDA-NEWS. Fitch Ratings says China-based residential developer Sino-Ocean Land Holdings Limited's (Sino-Ocean Land; BBB-/Stable) increase in total debt (including perpetual) - to CNY54.5bn in 2015 from CNY48.1bn in 2014 - is in line with the agency's expectations and neutral to the company's rating.

Leverage, as measured by net debt/adjusted inventory, had dropped slightly to 39% by end-2015 from 42% at June 2015. The ratio is consistent with our standalone rating of 'BB', and is in line with its 'BB' rated peers. The company raised CNY10bn onshore guaranteed notes in 2H15, which helped to lower its average funding cost to 6.25% in 2015 from 7.08% in 2014.
The company says the proceeds will be used to replace the higher-cost offshore bonds (including the perpetual), and management is targeting a reduction in total debt by end-2016 and a lower average funding cost in 2016.

Sino-Ocean Land's plan to remain prudent in its new land-acquisition strategy is supportive of its ratings. Lower working-capital investment helped turned funds flow from operations positive in 2015 - with the modest CNY7bn in new land acquisitions versus CNY16bn in 2014. The company had an attributable land bank of approximately 15 million square metres (sq m) at end-2015, which should be sufficient for property development and investment in the next four to five years.

Sino-Ocean Land has ample liquidity, with total cash balance (including cash and cash equivalents and restricted bank deposits) rising to CNY23.7bn from CNY14.0bn at June 2015. It should be able to fund its land acquisitions and repay part of its borrowings such that its contracted sales/total debt ratio will recover to above 0.8x by end-2016 from 0.7x in 2015. Fitch expects net debt to be no higher than in 2015. Net debt dropped to CNY30.7bn in 2015, from 31.8bn in 2014.

Sino-Ocean Land is expanding its real estate finance business and other businesses to build synergies with its homebuilding operation and to provide an additional source of income in the long term. We believe the impact of the new businesses is still immaterial, given their small scale, although closer business cooperation with its major shareholder China Life Insurance Company Limited (A+/Stable) may enhance Sino-Ocean Land's business profile in light of the insurer's leading market position.