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Rating Action:

Moody's assigns first-time Baa3 ratings to Sino-Ocean Land; outlook stable

 The document has been translated in other languages

Global Credit Research - 18 Jul 2014

Hong Kong, July 18, 2014 -- Moody's Investors Service has assigned a first-time Baa3 issuer rating to Sino-Ocean Land Holdings Limited.

Moody's has also assigned a Baa3 senior unsecured rating to the proposed bonds to be issued by Sino-Ocean Land Treasure Finance I Limited, a wholly-owned subsidiary of Sino-Ocean Land, based on the unconditional and irrevocable guarantee of Sino-Ocean Land.

The ratings outlook is stable.

The bond proceeds will be used for repayment of existing indebtedness and for general corporate purposes.

RATINGS RATIONALE

"Sino-Ocean Land's Baa3 issuer rating reflects its standalone credit strength and a two-notch rating uplift, based on expected strong support from China Life Insurance Co Ltd. (financial strength A1 stable), its largest shareholder with a 29% equity stake," says Franco Leung, a Moody's Vice President and Senior Analyst.

"Sino-Ocean Land's standalone credit profile reflects its long operating history in the property sector since 1993 -- with leading positions in its core markets, such as Beijing and Pan-Bohai Rim Region -- and its prudent expansion strategy," says Leung, who is also Moody's Lead Analyst for Sino-Ocean Land.

Sino-Ocean Land has established a strong brand name and is one of the top developers in some of its core cities.

Its contracted sales in 2013 totalled RMB35.8 billion, thereby placing it among the top 15 Chinese property developers in Moody's rated portfolio.

Despite having a sizable land bank that is fairly diversified geographically, the company has managed its growth risks prudently over the past 2-3 years, against a backdrop of challenges such as the high costs for land.

Consequently, the company has developed a disciplined approach to business expansion.

"Its mass-market-focused strategy, supported by its diversified products offering and the increasing recurring revenue contribution from its investment property portfolio, will offer stability to its operating performance," says Leung.

While the company's residential property development business has expanded more rapidly than its commercial property business in recent years, it enjoys diversity in its product offerings. Commercial properties (including car parks) constituted about 17% of its total contracted sales for FY2013.

In addition, Sino-Ocean Land receives rental income from its investment property portfolio which had total revenue of around RMB550 million in 2013. Moody's expects the recurring income from its investment property portfolio to rise over the next few years, which will enhance the stability of its operating cash flows and interest coverage.

"The standalone credit strength also reflects Sino-Ocean Land's good access to funding, which will support its long-term development," adds Leung.

Given Sino-Ocean Land's relatively long listing history, when compared with many of its domestic peers, it has developed good access to the offshore capital markets and offshore bank financing.

"On the other hand, the company's standalone credit strength is constrained by its moderate profitability and interest coverage," says Leung.

Sino-Ocean Land's profit margins declined during 2011-2013. Although the declining trend is in line with many of its domestic peers, its gross profit margin of about 24.3% in 2013 is relatively low, and is reflective of the company's strategy of increasing its focus on the mass-market segment and expanding into new regions over the past few years.

Interest coverage -- as measured by adjusted EBITDA/interest -- is relatively weak, standing at around 2.2x in 2013. However, Moody's expects it to improve to 2.5x -3.0x over the next 1-2 years, resulting from higher revenue recognition, while gross profit margins will stabilize at current levels.

While China Life owns 29% of Sino-Ocean Land, the latter is an integral part of China Life's long-term real estate investment strategic plans.

The two notches of ratings uplift reflect Moody's expectation that China Life will extend support to Sino-Ocean Land, considering: (1) China Life has a track record of providing financial support to Sino-Ocean Land; (2) Sino-Ocean Land is China Life's sole strategic equity investment in the real estate sector; and (3) China Life is expected to increase real estate development cooperation with Sino-Ocean Land, leveraging on its design, operations and market knowledge.

Moody's has not notched the issuer rating to reflect subordination risk, even with operating company debt amounting to around 21% of consolidated assets at end-2013. This approach reflects Moody's expectation that the company will continue to increase the portion of offshore debt to total debt, such that this ratio will trend below 15% over the next two years.

The stable outlook reflects Moody's expectations that Sino-Ocean Land will continue to prudently manage its expansion and maintain the stability of its credit profile. It also incorporates Moody's expectation that China Life will remain as the company's largest shareholder.

Upward rating pressure could emerge if the company: (1) consistently meets its sales targets and continues to implement its disciplined approach to acquiring land and managing its financial profile; (2) maintains stable profitability through business cycles; and/or (3) improves its credit metrics, such that adjusted EBITDA/interest coverage rises above 3.5x and revenue/debt above 110% on a sustained basis.

Downward rating pressure could emerge if (1) it persistently delivers lower-than-expected contracted sales growth; (2) profit margins come under further pressure, which would in turn drive interest coverage below 2-2.5x; and/or (3) the company engages in material debt-funded acquisitions, such that revenue/debt drops below 80-90% on a sustained basis.

Any evidence of a reduction in ownership or weakening in the support from China Life, or a deterioration in China Life's own credit profile, could also be negative for the ratings.

The principal methodology used in this rating was the Global Homebuilding Industry published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Sino-Ocean Land is one of the leading property developers in Beijing and the Pan-Bohai Rim Region. It focuses on developing mid-to-high-end residential properties, office premises and retail properties. At end-2013, it had a land bank of about 21.35 million square meters with over 50 development projects in 19 cities in China.

The Beijing-based company was listed on the Hong Kong Stock Exchange in September 2007. China Life Insurance Co Ltd. (A1 stable) and Nan Fung International Holdings Limited (Baa3 stable) are the largest and second largest shareholders of Sino-Ocean Land, with respective 29% and 21% equity stakes at end-2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Franco Leung
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time Baa3 ratings to Sino-Ocean Land; outlook stable
No Related Data.

 

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