OREANDA-NEWS. Fitch Ratings has affirmed China-based Oceanwide Holdings Co. Ltd.'s (Oceanwide) Long-Term Issuer Default Rating (IDR) at 'B' with Stable Outlook.

At the same time, Fitch has affirmed the property developer's senior unsecured rating and the rating on its outstanding USD320m senior notes issued by Oceanwide Real Estate International Holding Company Limited and USD600m senior notes issued by Oceanwide Holdings International 2015 Co., Ltd. at 'B' with Recovery Rating of 'RR4'.

Oceanwide's rating is supported by its strong sales growth and good-quality land bank. The rating is constrained by the rapid increase in net debt to CNY51bn in 1Q16 from CNY35bn in 2014. The trend is likely to continue in the next 18 months as the company ramps up development expenditure to support sales growth and continues to invest in its finance business.

KEY RATING DRIVERS

Strong Sales Growth Maintained: Fitch expects Oceanwide's contracted sales to continue to increase in 2016 and 2017 due to accelerated project launches in Wuhan and substantial sales from new projects in Beijing and Shanghai. Contracted sales rose by 55% in 2015 to CNY15.1bn, and are on track to hit around CNY17bn in 2016 and CNY20bn in 2017. Fitch expects Oceanwide to generate positive operating cash flow from its property business to fund its expansion into the financial sector after achieving contracted sales of over CNY20bn.

However, aggressive debt-funded expansion will continue to put pressure on Oceanwide's debt servicing ability and Fitch measures such risk based on the company's ratio of contracted sales to net debt excluding debt attributable to financial institutions (FI). Fitch expects this ratio to rise above 0.3x from 2017, compared to 0.27x expected in 2016 and 0.3x in 2015.

Finance Expansion to Continue: Oceanwide is aggressively diversifying its business from pure property development to financial institutions since 2014. It has spent over CNY20bn to build its finance business, which includes securities, trust, insurance and internet finance. We expect Oceanwide to continue to invest heavily in the finance sector with an aim to secure licenses for a full range of finance businesses and this will continue to put pressure on its leverage.

Leverage Remains High: Oceanwide's leverage (as measured by net debt/adjusted inventory), after deconsolidating the debt of the FI business reached 81.5% in 1Q16 (2014: 81.3%), which is higher than that of 'B' rated peers. Fitch expects this ratio to remain above 80% due to Oceanwide's property development business model, which requires more time to generate sales because the primary land development phase is usually lengthy. Oceanwide's consolidated net debt jumped to CNY51bn at end-March 2016 from CNY35bn in 2014, driven mainly by increased development expenditure, the rapid expansion of its finance business, additional investments in financial assets and overseas acquisitions.

High Quality Land Bank: Oceanwide's large land bank, most of which was acquired many years ago, is sufficient for more than 10 years for development. Sites in Tier 1 cities like Beijing and Shanghai, affluent Tier 2 cities like Wuhan and major cities in the US make up 87% of its land bank. One of Oceanwide's projects in Beijing is located close to the city's central business district within the 4th Ring Road. The low land cost for this large site in Beijing supported Oceanwide's overall EBITDA margin of over 35% in the past three years, and Fitch expects this to stay above 30% over the next 24 months - one of the highest margins among Chinese developers. Oceanwide has low land-replenishment needs.

Enhanced Liquidity: Oceanwide had more than CNY35bn in cash on hand as of end-March 2016 following aggressive fundraising. The company is in the process of raising another CNY15bn through a private share placement, which is expected to be completed by end-2016. The cash will be used for property development and capital injection into the insurance business. Oceanwide also has raised CNY18.5bn via bonds since September 2015 at an average interest rate of 6%-7%, which is significantly lower than its historical funding cost of about 9%. The funds have been deployed to replace expensive trust loans and Oceanwide is continuing to optimise its debt profile.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Limited new land acquisitions at 0.1x of contracted sales in terms of gross floor area

- Contracted sales growth driven mainly by increase in average selling prices to CNY35,000/square metre in 2016-2018 from CNY32,148/square metre in 2015

- Property development gross margin of 50% in 2016-2018 (lower than in previous years, due to higher construction cost)

- Lower dividend payout ratio than in previous years

RATING SENSITIVITIES

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- Contracted sales/net debt excluding debt attributable to financial institutions sustained below 0.25x; or a sustained deterioration of this ratio

- EBITDA margin sustained below 35%

- Substantial weakening of the credit profile of its key financial institutions

Positive: Positive rating action is not expected in the next 12-18 months due to Oceanwide's high leverage.