OREANDA-NEWS. Fitch Ratings has affirmed Modern Land (China) Co., Limited's (Modern Land) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B'. The Outlook on the IDR is Positive. Fitch has also affirmed Modern Land's senior unsecured rating and the ratings on all outstanding bonds at 'B', with Recovery Rating at 'RR4'. Fitch may consider upgrading the IDR in six months if Modern Land meets the thresholds for positive rating action.

Modern Land's attributable contracted sales increased slower than we expected. It rose 12% in 2015 compared with 52% in 2014. This was partly due to the limited good-quality land bank in the company's targeted regions, which is a key constraint on Modern Land's rating. However Modern Land has been trying to acquire more good-quality sites in Tier 1 and 2 cities through joint ventures (JVs) and M&A to address the problem. Fitch believes that Modern Land will continue to expand if the land bank strategy is successfully implemented.

Modern Land has sufficient financial resources to sustain a larger business scale. Leverage as measured by net debt/adjusted inventory remained low at 22% in 2015. Fitch will continue monitoring the company's operations to determine if Modern Land's IDR should be upgraded.

KEY RATING DRIVERS

Land Bank is Bottleneck: Fitch considers Modern Land's modest land bank to be the key obstacle to future expansion. Its gross available-for-sale land bank is 3.5 million sqm, representing less than CNY30bn of gross saleable resources. This is barely enough to sustain three years of contracted sales if we assume annual gross contracted sales of CNY10bn. Although Modern Land has extended its geographic coverage to more Tier 1 and 2 cities in recent years, Xiantao and Dongdaihe, two Tier 4 cities in China, still account for most of the attributable unsold land bank.

Fitch expects Modern Land to keep investing in land to sustain two to three years of property development. The company is eying opportunities in metropolitan areas in Beijing, Shenzhen and Shanghai. Modern Land is likely to acquire sites through JVs and M&A because of the limited land supply in these areas. Any sharp increase in land costs may significantly change the leverage outlook and may cause Fitch to take negative rating action.

Small Scale: Modern Land's contracted sales rose 53% to CNY11.3bn in 2015, beating the CNY11bn target. However attributable contracted sales increased only 12% to CNY7.5bn because more sales were generated from JVs. Attributable sales accounted for 66% of the company's total sales in 2015, down from 90% in 2014. Modern Land targets to achieve CNY15bn sales in 2016, and its attributable sales may meet the CNY10bn threshold where Fitch will consider taking positive rating action.

Low Leverage, Margin Drop: Modern Land's financial profile is still robust and comparable with 'B+'-rated peers. Leverage rose to 22% in 2015 from 8% in 2014. Fitch expects leverage to remain below 30% until the company's attributable contracted sales reaches CNY10bn. EBITDA margin dropped 9pp to 23% in 2015 and is likely to narrow further while the existing low-cost land bank is gradually depleted. Gross profit margin in 2015 shrank to 30% from 40% in 2014, but Fitch expects it to be maintained at 25%-30% in the next three years.

Sufficient Liquidity: Modern Land's liquidity remains healthy with total cash of CNY3.6bn, compared with short-term debt of CNY1.7bn. Modern Land completed a HKD300m (CNY250m) share placement in 2015 and plans to issue more domestic bonds in 2016 to shore up liquidity.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Attributable contracted sales of CNY10bn in 2016, CNY12bn in 2017, CNY15bn in 2018 and CNY18bn in 2019
- New land investment to maintain land bank at two years' worth of gross contracted sales
- Average selling price to increase around 10% each year to reflect the higher cost of recently acquired land
- Construction cost per square meter of around CNY3000-4,000 in 2016-2019

RATING SENSITIVITIES

Positive: Future developments that may individually or collectively, lead to a rating upgrade to 'B+' include:
- Achieve attributable contracted sales target of CNY10bn in 2016 while on a sustainable growth path
- EBITDA margin sustained above 25%
- Net debt/adjusted inventory sustained below 30%

Negative: Future developments that may individually or collectively, lead to revision to a Stable Outlook include:
- Failure to achieve the above factors within six months

FULL LIST OF RATING ACTIONS

Long-Term Foreign-Currency and Local-Currency IDR affirmed at 'B'; Outlook Positive
Senior unsecured rating affirmed at 'B', Recovery Rating at 'RR4'
CNY1.1bn 11% senior notes due 2017 affirmed at 'B', Recovery Rating at 'RR4'
USD150m 13.875% senior notes due 2018 affirmed at 'B', Recovery Rating at 'RR4'
USD125m 12.75% senior notes due 2019 affirmed at 'B', Recovery Rating at 'RR4'