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TEXT-Fitch Rates Sunac's Proposed Notes 'BB-(EXP)'

(The following was released by the rating agency)

October 05 (Fitch) Fitch Ratings has assigned property developer Sunac China Holdings Limited's (Sunac, 'BB-'/Stable) proposed senior unsecured USD notes an expected rating of 'BB-(EXP)'.

The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. The proceeds will be used to finance land acquisitions and for general corporate purposes.

Sunac's ratings are supported by its strong housing presales performance and its increased business scale in the Chinese housing market. For the first eight months of 2012, the company achieved CNY16bn contracted sales, or 71% yoy growth. Its average selling price (ASP) of CNY16,700 per square metres (sqm) has been increasing gradually from January notwithstanding current housing purchase restrictions.

The slowdown of Sunac's housing presales in the last two months was in line with that of Chinese peers and Fitch expects its sales performance to stabilise for the rest of 2012. Furthermore, the company's 2.8m sqm of available-for-sale residential properties as at June 2012 supports future presales growth.

Sunac's strength in the Beijing and Tianjin markets is evidenced by the partnerships it has with leading property companies in both cities. It has formed joint ventures with Franshion Properties (China) Limited (Franshion, 'BBB-'/Stable) in a Beijing project and with Poly Real Estate Group Company Limited (Poly) in a Tianjin project.

Partnering with Greentown in the Eastern China region following its acquisition of stakes in nine Greentown projects further strengthen its market position in Wuxi, and helps its expansion into the important Shanghai housing market. The ratings are constrained by Sunac's limited geographical diversification and product mix.

Its land banks are concentrated in Tianjin and Beijing, which together represent 53% of total sales in January-August 2012 and 14 out of a total of 22 projects, without considering the Greentown projects. Its focus on mid- and high-end properties implies that it is more exposed to the home purchase restrictions imposed by the Chinese government.

However, Fitch notes that this niche position is the main driver of the company's high profitability, a key rating driver. Sunac's Stable Outlook reflects its adequate liquidity position given its strong presales. The consideration of CNY3.4bn for the Greentown projects, which has been fully paid in August and September, falls within Fitch's assumption of the company's land replenishment expenditure in 2012.

What could trigger a rating action?

Negative: Future developments that may, individually or collectively, lead to negative rating action include: - adverse changes to Sunac's markets and product mix leading to an EBITDA margin below 25% (2011: 28.1%) -aggressive land-bank acquisitions resulting in funds from operations (FFO) interest coverage below 3x (2.6x in 2011 but Fitch expects this to exceed 3.5x from 2012) or net debt/inventory above 35% (34% in 2011) -contracted sales in 2012 of under CNY20bn

Positive: Positive rating action is not expected in the next 24 months given the constraints posed by its limited product mix and lack of diversification.

Keywords: MARKETS RATINGS SUNAC