September 14, 2017 / 9:00 AM / 2 years ago

Fitch Assigns Sino-Ocean's USD Perpetual Securities Final 'BB'

(The following statement was released by the rating agency) HONG KONG, September 14 (Fitch) Fitch Ratings has assigned Sino-Ocean Land Treasure III Limited's USD600 million subordinated perpetual capital securities a final rating of 'BB'. Sino-Ocean is a wholly owned subsidiary of Chinese homebuilder Sino-Ocean Group Holding Limited (BBB-/Stable). The perpetual securities are irrevocably and unconditionally guaranteed by Sino-Ocean Group and will have 50% equity credit until the fifth year, five years before the dividend pusher in year 10. Sino-Ocean said the proceeds of the proposed securities will be used for the general corporate purposes of Sino-Ocean Group and/or its subsidiaries in accordance with applicable laws and regulations. The assignment of the final rating and equity credit follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 6 September 2017. Fitch will accord 50% equity credit to the proposed perpetual capital securities until 2022, five years before the existence of look-back provisions in 2027 in accordance with Fitch's Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis criteria. Fitch believes the new hybrid security will be a permanent part of the group's capital structure, following discussions with management that indicate it is committed to hybrid capital. Sino-Ocean Group's ratings reflect the strong support from China Life Insurance Company Limited (China Life; A+/Stable), which provides a two-notch uplift from Sino-Ocean Group's standalone 'BB' credit profile. Sino-Ocean Group's standalone credit profile is supported by its strong focus on and leading position in targeted Tier 1 and 2 Chinese cities, increasing rental income, prudent land acquisitions, and its diversified funding channels. KEY RATING DRIVERS Support from China Life: China Life has positioned Sino-Ocean Group as its sole strategic real-estate investment platform in China. It holds 29.98% of Sino-Ocean Group and is committed to owning no less than 25% in the future. China Life's linkage with the property developer is strong and provides support for Sino-Ocean Group's rating level. China Guangfa Bank Co., Ltd. (BB+/Stable), in which China Life has a controlling stake, subscribed to 20% of the first phase of medium-term notes issued by Sino-Ocean Group in March 2017. Sino-Ocean Group may intensify its collaboration with China Life in investment property funds and the senior living business. Focus on Top-Tier Cities: Sino-Ocean Group continues to focus on Tier 1 and 2 cities, making it well-positioned to benefit from the strong demand in these cities. The Beijing-Tianjin-Hebei region will account for about 43% of its saleable resources in 2017 by value. At end-2016, 43% and 55% of Sino-Ocean Group's land bank by value was in Tier 1 and 2 cities, respectively, where the demand-supply dynamic is more balanced than in lower-tier cities. Sino-Ocean Group aims to raise contracted sales by about 39% to CNY70 billion in 2017, compared with about CNY110 billion of saleable resources. Its contracted sales in January-June 2017 rose 48% to CNY30.5 billion, while the average selling price (ASP) for contracted sales rose 21% to CNY18,600. Rising Rental Income: Sino-Ocean Group's attributable rental income from investment properties and property management fees increased 12% to CNY1.7 billion in 2016, due to the addition of a new office building in Shanghai, and higher rental and occupancy rates in its existing projects. Sino-Ocean Group is also expanding its property management, real estate finance and senior living businesses to provide an additional source of income in the long term. The contribution of new businesses is still immaterial, given their small scale. Prudent Land Acquisitions: Sino-Ocean Group's leverage, as measured by net debt/adjusted inventory (including guaranteed debt for joint ventures and associates), decreased to 34.9% in 2016 from 49.6% in 2015, due to stronger contracted sales and a prudent land acquisition strategy. The company acquired 19 projects for its land bank, with total gross floor area of 4.8 million sq m, at an attributable cost of CNY10.5 billion, which accounted for only 24% of its contracted sales proceeds in 2016. Fitch expects the company to spend about CNY20 billion-25 billion on land acquisitions in 2017, which will form about half of its contracted sales proceeds. Fitch expects its leverage ratio to increase to 35%-40% by end-2017 due to more land acquisitions. DERIVATION SUMMARY Sino-Ocean Group's standalone rating is more reflective of 'BB' category peers such as Guangzhou R&F Properties Co. Ltd. (BB/RWN), Beijing Capital Development Holding (Group) Co., Ltd. (BCDH, BBB-/Stable, standalone BB/Stable), and Yuexiu Property Company Limited (Yuexiu, BBB-/Stable, standalone BB/Stable). Sino-Ocean Group's contracted sales scale is smaller than Guangzhou R&F's and BCDH's, but higher than Yuexiu's. Its leverage of 35% is similar to Yuexiu's, but lower than Guangzhou R&F's and BCDH's. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales of CNY50 billion-70 billion per year in 2017-2019 (2016 total contracted sales: CNY50.4 billion) - EBITDA margin (excluding capitalised interest) at 23%-26% in 2017-2019 (2016: 23.9%) - Annual land replenishment cost at about 50% of total contracted sales for 2017-2019 (2016: 21%) - Attributable rental income from investment properties at about CNY1.8 billion-2.0 billion for 2017-2019 (2016: CNY1.7 billion) RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Evidence of strengthening linkage with China Life -EBITDA margin (excluding capitalised interest) sustained above 25% (2016: 23.9%) -Net debt/adjusted inventory (including guaranteed debt for JVs and associates) sustained below 35% (2016: 34.9%) -Contracted sales/gross debt (including guaranteed debt for JVs and associates) sustained above 1.25x (2016: 1.0x) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -EBITDA margin sustained below 20% -Substantial decrease in contracted sales -Net debt/adjusted inventory (including guaranteed debt for JVs and associates) rising close to 50% -Contracted sales/total debt (including guaranteed debt for JVs and associates) sustained below 0.8x -Evidence of weakening linkage with China Life LIQUIDITY Ample Liquidity: As at 30 June 2017, Sino-Ocean Group had unrestricted cash of CNY19.6 billion, enough to cover short-term debt of CNY8 billion. The company issued CNY4 billion in domestic bonds in March 2017. It also has approved but unutilised facilities of CNY146.7 billion at 30 June 2017. This will be sufficient to fund development costs, land premium payments and debt obligations in 2017. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9559 Date of Relevant Rating Committee: 5 September 2017 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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