OREANDA-NEWS. Fitch Ratings has affirmed China Resources Land Ltd's (CR Land) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency senior unsecured ratings and the ratings of its rated issues at 'BBB+'.

The affirmation reflects that CR Land's strong financial profile even though it has added five to six investment properties a year to build up its portfolio in this segment. CR Land continues to rely on property development to generate operating cash flow to support the expansion of its investment property portfolio. CR Land's development business is also comparable to other 'BBB+' rated Chinese homebuilders - given its strong market position in Tier-1 and Tier-2 cities and its prudent land acquisition strategy. The ratings are constrained by the small scale of the company's investment property business relative to its property-development business.

KEY RATING DRIVERS
Strong Performance in 2015: CR Land's contracted sales in 2015 increased by 23% to CNY85.2bn, but land acquisition expenditure was flat at CNY29.4bn on an attributable basis. Leverage, as measured by net debt/adjusted inventory, was only 15.9% at end-2015 (2014: 22.9%). Recurring rental income from investment properties increased 22.9% to HKD5.7bn in 2015. We expect the recurring income interest coverage - as measured by recurring rental income EBITDA to gross interest paid - to gradually improve to above 1.0x by 2018 from the estimated 0.6x in 2015.

Healthy Cash Generation from Development: CR Land continued to generate cash flow from operations (CFO) in its development business in the past four years, even though its development land bank expanded by 41% over the same time. Fitch expects its 2015 CFO to exceed HKD30bn with investment property land acquisitions treated as capex. CR Land will continue to adopt a prudent land acquisition strategy, targeting good locations in Tier-1 and Tier-2 cities and maximising operating cash flow from its property development business to support the expansion of its investment property portfolio and deleverage. CR Land plans to open 18 new malls with total gross floor area (GFA) of no more than 4.5 million sqm during 2016-2018. At this pace, the expansion can be fully funded by internally generated cash flows from sales of development properties and rental income.

Leading High-End Mall Operator: With 20 malls of total GFA of 4.3 million sq m in operation, CR Land is one of the largest high-end shopping mall operators in China. Fitch believes CR Land has one of the fastest-growing rental portfolios in China and GFA will increase to 6.1 million sq m by end-2017. Its assets are well-managed and provide the company with steady rental income. The good asset quality is reflected in its stable gross rental yield on a market value at about 9%, higher than an average of 5%-6% among the large Chinese mall operators.

Continued Support from Parent: CR Land's business profile is strengthened by the operational benefits it enjoys as a core subsidiary of China Resources Holdings (CRH). The parent supports CR Land by preparing prime land and large parcels for eventual development. These projects have generated sales and help CRH Land to maintain positive CFO. In January 2015, CR Land completed the acquisition of five projects from CRH, which contributed 23% of the total contracted sales in 2015. The new Shenzhen Bay project that is expected to be injected from CRH is estimated to contribute up to CNY4bn contracted sales in 2016. The company also enjoys lower funding costs of 4.63% in 2015 - a lower level compared with its peers.

Financial Headroom Supports Expansion: The current low leverage is among the lowest for Fitch-rated Chinese homebuilders, and provides headroom for further expansion. However, any sharp downturn in property sales or construction cost overruns could be detrimental to CRL's financials because its investment property capex is funded by its development business.

Investment Property Portfolio Still Small: Fitch believes that for CR Land to be rated at a higher level, the stable recurring income from its investment property business will need to offset the risks of its development business; which is subjected to market volatility and government policy risks. CR Land's investment property EBITDA/ gross interest coverage of 0.6x remains low compared to over 4x for Hong Kong property investment companies rated in the 'A' category. Furthermore, the investment property portfolio only accounted for less than 10% of the group's total EBITDA in 2015, even though the segment's rental revenue rose at a three-year CAGR of 15% to HKD5.7bn in 2015.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CR Land include:
-The pace of acquisitions of land for development stabilises after 2015, with 7 million sq m of GFA for development added annually.
-Contracted sales to grow in the high teens for 2016/2017
-Opening of investment properties in 2016 to 2017 in line with management guidance
- GFA of investment properties under development to stabilise at 5 million sq m from 2016, and new investment property development to stabilise at 1.4m sq m a year. Capex for investment property to peak in 2018
-Rental rates for its investment properties decrease slightly due to lower rates from new malls.
-No change in cost of debt

RATING SENSITIVITIES
Positive: Positive rating action is unlikely in the next 12 to 18 months due to the small scale of CR Land's investment property operation. In the longer term, positive rating action may result if the investment property segment becomes a more significant EBITDA contributor and investment property EBITDA/gross interest expenses is sustained above 2.0x.

Negative: Developments that may individually or collectively, lead to negative rating action include:
- Aggressive land bank acquisition strategy
- Decline in EBITDA margin of the development business to less than 20% (2015 estimated: 26.5%)
- Deterioration in investment property EBITDA/ gross interest coverage to below 0.5x over a sustained period (2015 estimated: 0.6x)