OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of China-based Oceanwide Holdings Co. Ltd.'s (Oceanwide) at 'B' with Stable Outlook. 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 have also been affirmed at 'B' with Recovery Rating of 'RR4'.

Oceanwide's rating has been affirmed as it remains on track to generate cash from the sale of development properties to fund its expansion into the financial sector. Fitch expects Oceanwide to meet its contracted sales target of CNY12bn in 2015 and start generating positive cash flow from operations (CFO) from 2016. The rating is constrained by the rapid increase in net debt to CNY35bn in 2014 from CNY22bn in 2013, which is likely to continue in 2015 as the company ramps up development expenditure to support sales growth.

The Stable Outlook reflects Oceanwide's sufficient funds to support its business transition and growth. The company has access to multiple funding channels, such as offshore and onshore note issuance and equity placement. The company's parent China Oceanwide Holdings Group Co., Ltd, (China Oceanwide) is also able to provide financial support, if needed.

KEY RATING DRIVERS

Heavy Expenditure to Continue: Fitch expects Oceanwide's net debt to increase in 2015 and peak in 2016 as it builds up its investment property portfolio. Development expenditure is also likely to remain high due to increased construction costs for projects in Beijing that began selling from 2015, accelerated project launches in Beijing, and the 50% share of commercial property projects in Oceanwide's land bank, which are only sold when the properties are near to completion. The company's investments in its finance businesses will also add to its leverage.

Asset Acquisitions: Oceanwide is diversifying its business model from pure property development to financial institutions in the long term. It spent over CNY5bn to acquire Minsheng Securities Co., Ltd, and China Minsheng Trust Co., Ltd from China Oceanwide, and invest in China Minsheng Investment Corp., Ltd. It also plans to acquire Minan Property & Casualty Insurance Co., Ltd for CNY1.8bn. Oceanwide has paid China Oceanwide for the non-insurance acquisitions. The parent has provided a keepwell deed to ensure that Oceanwide has sufficient liquidity. China Oceanwide has significant financial assets that allow it to provide liquidity support to Oceanwide if needed.

Property Concentration Risk: The projects in Wuhan and Beijing have over 8 million and 2 million sqm of gross floor area (GFA) respectively. Together, they account for over 80% of Oceanwide's total land bank and estimated contracted sales in 2015-2017. In Wuhan, there is a risk that housing demand and development in the city may not keep pace with the substantial housing supply from Oceanwide's projects, which could lower sales efficiency and hurt its liquidity.

The risk is mitigated by the Beijing projects, which will match Wuhan in sales value from 2015. The Beijing projects are located in the central business district and had low land costs.

Strong Sales Momentum Maintained: Fitch expects the company's contracted sales to continue to increase strongly (2014: CNY9.8bn, up 67%) due to accelerated inventory launch in Wuhan and substantial sales from new premium projects in Beijing. Oceanwide's CFO may turn positive from 2016 because of robust sales, strong profitability and low land replenishment. We expect the company to maintain EBITDA margin of close to 40% (2014: 43%) despite some dilution from the high per sqm development cost of its Beijing projects.

Ratios Used Reflect Transformation: Fitch measures Oceanwide's financial soundness based on its CFO and its inventory turnover (ratio of contracted sales to net inventory). Oceanwide's inventory turnover was 0.28x in 2014 but we expect this to exceed 0.5x from 2016 as sales from its large pool of properties under development increase while land replenishment remains minimal. The improved inventory turnover and likely generation of positive CFO will provide Oceanwide with funds to expand its financial businesses.

No Rating Impact from Consent Solicitation: Oceanwide announced on 16 July 2015 it would seek consent from bondholders to amend the indenture on its USD320m notes, with the aim of giving the company more flexibility in its business transition. The transition has already been taken into account in Fitch's ratings and the consent solicitation, if implemented, will have no rating impact. Major proposed amendments include expanding the definition of permitted business to include finance, energy, internet, and technology; and raising the cap on permitted investment (excluding listed liquid assets) to 30% of total assets.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Limited new land acquisitions at 0.1x-0.4x of contracted sales GFA
- Contracted sales growth mainly driven by growth in average selling prices from CNY24,000/sqm to CNY34,000/sqm in 2015-2018
- Property development gross margin of 50%-53% in 2015-2018 (lower than in previous years due to higher construction cost)
- Lower dividend pay-out ratio than in previous years

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to achieve positive operating cash flow in 2016
- EBITDA margin sustained below 35%
- Contracted sales/net inventory sustained below 0.5x
- Substantial weakening of Minsheng Securities' credit profile

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