TEXT-Fitch affirms Sun Hung Kai Properties at 'A';outlook stable

Tue Oct 16, 2012 6:40am EDT

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(The following statement was released by the rating agency)

Oct 16 - Fitch Ratings has affirmed Hong Kong-based Sun Hung Kai Properties Limited's (SHKP) Long-Term Issuer Default Rating (IDR) at 'A' and its Short-Term IDR at 'F1'. The Outlook is Stable. Fitch has also affirmed SHKP's senior unsecured rating at 'A'.

SHKP's ratings reflect its solid franchise in Hong Kong's property sector as developer and investor and its prudent financial strategy. SHKP has a long operating history in real estate investment dating back to the 1970s. The Stable Outlook reflects Fitch's expectation that SHKP will maintain a stable business mix and a strong financial profile over the next 18 to 24 months.

SHKP is one of the largest landlords in Hong Kong, owning 28.5 million square feet (sq ft) of diversified investment properties. It has maintaining a high occupancy rate at 95% and generated rental EBITDA HKD8.63bn for the financial year ended June 2012 (FY11: HKD7.41bn). In Fitch's view SHKP's strong investment property portfolio helps moderate its cyclical property development business.

SHKP's financial metrics are in line with other Hong Kong property investment companies rated in the 'A' category. Investment property EBITDA/interest coverage stood at 4.2x in FY12, lower than 5.6x in FY11 due to higher interest expenses. Fitch expects the ratio to remain above 4x, underpinned by a resilient rental income stream from its existing portfolio and gradually increasing contribution from new investment properties.

Property investment income is further supported by recurring income from SHKP's hotel, telecommunications and logistics businesses, which provided a further HKD3bn EBITDA in FY12. Total recurring EBITDA from these businesses provided 5.7x interest coverage. The company maintained low leverage, with net loan to investment property value of 24% for FY12 (FY11: 25%).

For its property development segment, SHKP maintained a track record of execution ability. SHKP's strong brand name in property development encourages high take-up for its property projects. The company maintains a stable project completion pipeline while its current landbank is adequate for at least five years of development.

What could trigger a rating action?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- recurring EBITDA/gross interest expense sustained below 4x

- EBIT/gross interest expense sustained below 6x

- net debt /investment property asset sustained above 30%

- further developments related to the charges against the Directors by Hong Kong's Independent Commission Against Corruption adversely affecting SHKP's operations and financials. These developments may include SHKP itself being charged, and its business operations facing sanctions or restrictions - or facing higher borrowing costs relative to its peers or difficulty in raising fresh funds.

Positive: Fitch does not envisage any positive action within the next 18-24 months, as the rating is constrained by exposure to the volatile homebuilding segment.

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