OREANDA-NEWS. Fitch Ratings has affirmed China-based Shimao Property Holdings Limited's Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook is revised to Positive from Stable. Fitch has also affirmed Shimao's senior unsecured rating and the ratings on its outstanding notes at 'BB+'. The full list of rating actions is at the end of this commentary.

The Outlook revision reflects Fitch's expectation that Shimao will achieve its target of generating positive net cash flow from operating activities in 2015, driven by a slower pace of land acquisition. The ratings are supported by the home builder's strong execution track record, leadership in key regions and stable margins that are also higher than that of its peers.

KEY RATING DRIVERS
Operating Cash Flow Turnaround: Fitch expects Shimao to achieve positive net cash flow from operating activities in 2015, in line with the company's target. The improvement in net cash flows is driven by the improving housing demand in higher-tier cities as a result of better liquidity available to home buyers, and Shimao's slower pace of land acquisitions.

Land Banking Decelerates: Fitch expects Shimao's slower pace of land acquisitions to continue in the next two years, which will allow it to generate positive operating cash flow. This will allow Shimao to keep its leverage as measured by net debt/adjusted inventory, to below 25%. Shimao's land bank in 2014 would be sufficient to maintain its sales activity for another six years, compared with almost nine years in 2012, after it slowed down on land purchases from 2013. The ratio of gross floor area (GFA) of land acquired to contracted sales GFA decreased to 1.13x in 2014 from 1.39x in 2013, and this was over 2.5x in 2010 and 2011. Shimao's land bank fell to 33.3million sqm by end-1H15, compared with 36 million sqm in 2013 and 2014.

Rising Contracted Sales: Fitch believes Shimao can meet its full-year contracted sales target of CNY72bn in 2015; having achieved contracted sales of CNY35.6bn by July 2015, 49.4% of its full-year target. The company's robust internal organisation structure, through its eight business regions, and timely management information system have significantly strengthened its operational versatility in responding to shifts in market demand. Shimao overcame weak market conditions in 2014 to generate a 5% increase in contracted sales to CNY70bn in 2014, which was within Fitch's expectations.

Multi-Regional Player: Fitch believes Shimao will continue to achieve strong sales in its core regional markets given its market leadership, brand reputation, local know-how and operational efficiency. The company's multi-regional exposure helps mitigate city or province specific risks like demand-supply imbalances and housing policy changes. Shimao is a leading player in the Yangtze River Delta region and has built entrenched businesses in other regions across China. Core markets in cities such as Hangzhou, Shanghai, Ningbo, and in the Fujian and Jiangsu provinces accounted for around 60%-70% of contracted sales in 2014 and 2013.

Stable EBITDA Margins: Shimao's EBITDA margin is higher than that of its 'BB' category peers of 20% to 25%. Shimao's EBITDA margin was 26.3% in 2014, and has been just below 30% since 2012. The reduced margin reflected the company's change in product mix to focus on first-time buyers and upgraders. Fitch expects Shimao to maintain its EBITDA margin for the next two years, but it may narrow thereafter as competition intensifies in the sector.

Well-Established Funding Channels: Shimao has actively managed its offshore debt maturity profile by refinancing its debt. This has resulted in interest costs falling to around 6.8% in 2014 from over 8% in 2012. Fitch expects Shimao's interest costs to trend downwards as lower-cost domestic bond financing is now available for homebuilders. Management's focus on maintaining both ample liquidity and ready access to various funding channels further supports its ratings.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by GFA to increase by 3% over 2016-2018;
- Average selling price for contracted sales to increase by 2% for 2016-2018;
- Fitch estimates the EBITDA margin at 23%-25% in 2016-2018

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failing to maintain the positive guidelines will lead to the Outlook reverting to Stable

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Sustaining trend of positive cash flow from operating activities
- EBITDA margin above 22% on a sustained basis (2014: 26.3%, 1H15: 24.2%);
- Maintaining the ratio of net debt to net adjusted inventory below 35% on a sustained basis (2014: 27.1%, 1H15: 26.3%);
- Maintaining the ratio of contracted sales to gross debt above 1.25x on a sustained basis (2014: 1.12x, 1H15: 0.94x).

FULL LIST OF RATING ACTIONS

- Long-Term Foreign-Currency IDR rating affirmed at 'BB+', Outlook revised to Positive
- Senior unsecured rating affirmed at 'BB+'
- USD800m 6.625% senior unsecured notes due 2020 affirmed at 'BB+'
- USD600m 8.125% senior unsecured notes due 2021 affirmed at 'BB+'
- USD1.1bn 8.375% senior unsecured notes due 2022 affirmed at 'BB+'