OREANDA-NEWS. Fitch Ratings believes that China Overseas Land & Investment Limited's (COLI; A-/Stable) prudent land-banking strategy will help to strengthen its financial profile further.

We see COLI as having the lowest downside risk on maintaining profitability among Chinese homebuilders, given that it is shying away from building its land bank when land prices have risen rapidly. The acquisition of the CITIC Group's property portfolio will provide an additional land bank of attributable GFA of 23.52 million sq m to COLI. COLI's full-year 2015 EBITDA margin was 27.5%, despite challenging market conditions where industry margins slipped to between 20%-25% from 30% in previous years. Cash flow from operations (CFO) peaked at HKD38bn while leverage (measured by net debt/adjusted inventory) was at its lowest for the past four years at 5.3%.

COLI has maintained a conservative approach to its land bank acquisitions even as the land-auction markets show signs of overheating. COLI acquired four parcels of land of total attributable gross floor area (GFA) of 2.28 million square metres (sq m) at a cost of CNY8.2bn in 1H16: one is in Hong Kong, two parcels are replenishment of existing projects in China, and one is a new project. The total land premium for the three land parcels in China of attributable GFA of 2.17 million sq m was CNY6.4bn. The land premium is 22% lower than in the same period in 2015, when COLI acquired five parcels of land in China with an total attributable GFA of 2.26 million sq m at a cost of CNY8.3bn.

On the other hand, overall market conditions in 1H15 were much weaker than in 1H16, as demonstrated by COLI's lower group contracted sales of HKD85.45bn with GFA of 5.8 million sq m for first six months in 2015 compared with HKD95.26bn with GFA of 6.0 million sq m for same period in 2016.

COLI is rated the highest among Chinese homebuilders, and a further upgrade is unlikely due to the highly cyclical nature and high regulatory risks in the Chinese property sector.