OREANDA-NEWS. Fitch Ratings says that Chinese homebuilder Xinyuan Real Estate Co., Ltd.'s (Xinyuan; B/Stable) weaker margin in 2015 will not affect the company's ratings as Fitch expects margin to recover in 2016.

Xinyuan's gross margin declined to 23% in 2015, from 26% in 2014 and 33% in 2013, due to strong sales contribution from Suzhou, Shanghai and Beijing - cities where land costs are higher. EBITDA margin (after adjusting for capitalised interest) also narrowed, to 11.8% in 2015 from 14.4% in 2014, due to the sustained high selling, general and administration (SG&A) costs, which have risen to 12%-15% of contracted sales since 2014.

However, Fitch expects gross margin to improve in 2016 in line with the increase in average selling prices (ASPs) in high-tier cities at end-2015 and early 2016. For instance, the ASP for the Suzhou Lake Royal Palace project rose to CNY13,482 per square metre (sqm) in 4Q15 from CNY9,446 in 3Q2015.

Fitch expects Xinyuan's leverage to climb in 2016 as the company replenishes its land bank, after not making any land acquisitions in 2015. Xinyuan's leverage - measured by net debt/adjusted inventory - declined to 42.9% at end-2015 from 43.7% at end-2014.

The company's contracted sales rose 34% to CNY8.6bn in 2015 following strong sales in the fourth quarter amid favourable sentiment in the property market. Sales were robust in its projects in Zhengzhou, Jinan, Suzhou, Kunshan and Beijing.

Xinyuan's total sellable gross floor area (GFA) fell 25% to 2.3 million sqm at end-2015. Its land bank will last 2.3 years (based on 2015 sales), which remains low compared to 'B'-rated peers. Apart from normal public auctions, Xinyuan pays advance deposits on land it wants to local government or industry partners to secure a large part of its future land bank. There is greater uncertainty about the company's land bank as a result of this acquisition strategy, which continues to constrain its scale and sales.