Fitch Affirms Sun Hung Kai Properties at 'A'; Outlook Stable

Mon Nov 4, 2013 10:28pm EST

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(The following statement was released by the rating agency) HONG KONG, November 04 (Fitch) 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'. KEY RATING DRIVERS Strong investment property portfolio: SHKP owns 28.6m sf GFA of completed investment properties in Hong Kong, with HKD10.2bn in leasing EBITDA in FY13, making it the biggest commercial landlord in Hong Kong in terms of rental income. SHKP also completed 9.5m sf of investment properties in first-tier cities on mainland China, mainly in Shanghai, generating leasing EBITDA of HKD1.5bn in FY13. With a continuous investment portfolio pipeline in Hong Kong and mainland China, Fitch expects SHKP to maintain strong investment property EBITDA interest cover of over 4x. Xujiahui project raises leverage: Fitch expects SHKP's net leverage (net debt/investment property value), based on investment property value, to increase to 27.3% from 18.6% in mid-2013, right after the HKD27bn land payment of Xujiahui Centre Project. In our view, the investment will only raise SHKP's leverage in the short term. Fitch expects its leverage to improve after FY15, when sales of Xujiahui office towers commence, with potential sales proceeds of over HKD20bn. Fitch believes the land was bought at a reasonable price, and expects the project, when completed, to generate over HKD2bn of annual leasing EBITDA. Deleverage by flexible pricing: Fitch expects SHKP to deleverage by speeding up Hong Kong residential launches, selling its office buildings in decentralised areas and disposing of its non-core assets. SHKP has abundant experience and strong execution skills in project sales. It recently re-launched a luxury project - The Cullinan - by offering bigger discounts and stamp duty rebates to buyers. The flexible pricing strategy reignited the weak market sentiment and the units were snapped up quickly. Fitch expects SHKP to remain flexible on pricing in the upcoming project launches so as to deleverage and recycle its capital. Uncertain HK property outlook: With record-high price-to-income ratio, increasing housing supply and the expectation of rising mortgage rates, we believe Hong Kong's housing prices will be under pressure in the next one to two years. This may cause SHKP's contracted sales to decline. In fact, developers started to provide more price cuts and tax rebates in recent primary launches. While the uncertain housing market outlook will constrain SHKP's current ratings, we believe SHKP will be very prudent in its land purchase in Hong Kong, as shown by its track record in FY02-03 and FY08-09. Prudent financial management: Fitch expects SHKP to maintain healthy interest coverage and leverage after the Xujiahui land payment is settled. SHKP's recurring income (excluding property sales income) EBITDA interest cover and EBIT interest cover are expected to stay above 5.5x and 8x respectively in the next two fiscal years. Net leverage (net debt/investment property value) may reach 26% in FY14-15, but will then fall, underpinned by Xujiahui office sales. SHKP is not likely to make another sizable investment in China in the next few years. We do not expect SHKP to purchase land aggressively in Hong Kong, given the policy risk and uncertain property market outlook. No impact from charges: The criminal trial of the corruption case involving the Kwok brothers (Raymond Kwok Ping-luen and Thomas Kwok Ping Kwong, co-chairmen of SHKP) and former chief secretary Rafael Hui Si-yan will take place in May 2014. The trial is estimated to take 70 days. Fitch keeps the same view that SHKP would be able to maintain its current operations even if the Kwok brothers charged by Hong Kong's Independent Commission Against Corruption (ICAC) are no longer able to discharge their duties, as the company's day-to-day operations are managed by a team of professionals. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include- - recurring EBITDA/gross interest expense sustained below 4x (FY13: 6.2x) - EBIT/gross interest expense sustained below 6x (FY13: 8.6x) - net debt /investment property asset sustained above 30% (FY13: 18.6%) - further developments related to the charges against the Directors by Hong Kong's Independent Commission Against Corruption (ICAC) 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. Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 2801, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Michelle Leong Associate Director +852 2263 9929 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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