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Jan 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Hong Kong-based Hopewell Holdings Limited's (HHL) Long-Term Foreign-Currency Issuer Default Ratings (IDR) at 'BBB-'. The Outlook is Stable.
KEY RATING DRIVERS
Stable Asset Portfolio: HHL's IDR is underpinned by its stable cash flows from toll roads and its investment property portfolio. The Stable Outlook reflects our view that HHL's credit profile will remain acceptable for its current rating despite the expected increase in financial leverage in the next few years due to spending to develop the Hopewell Centre II property project.
Strong Toll-Road Business: The toll-road business, which is managed via Hopewell Highway Infrastructure Limited (HHI, 68% owned by HHL), has continued its relatively stable performance despite the launch of toll waivers during public holidays and tariff cuts in 2012. An overall increase in traffic volume is driven by continued economic growth in Guangdong province, and improving connections to local road networks and strategic locations. The opening of Phase III West of the Western Delta Route in January 2013 drove an increase in revenue in Phase II West (27% increase in the financial year ended June 2013) and resulted in new revenue from Phase III West (daily toll revenue of CNY455,000 in December 2013).
Solid Rental Income: Fitch expects the property investment business to continue to post a solid performance following a strong showing FY13. Rental revenue increased 13% to HKD0.8bn in FY13. HHL has a few property investment projects in the pipeline, such as the Lee Tung Street project and Hopewell Centre II, which are expected to generate synergies for existing property assets and provide more cash flow upside for HHL in the next three to five years.
Limited Operating Scale: The issuer's IDR is constrained by its limited scale. Both the toll-road and property investment portfolios are relatively small. Its existing investment property assets are less 'prime' than those of its Hong Kong peers rated in the 'BBB' and 'A' category in terms of locations and/or scale.
Increasing Leverage: HHL's leverage is likely to increase within the next two years and come close to Fitch's threshold when it would consider negative rating action . However, Fitch expects leverage to return to a level consistent with its current rating once the sales proceeds from the residential portion of the Lee Tung Street project remit back to HHL.
Negative: Future developments that may individually or collectively lead to negative rating action include
- Aggressive change in business mix and strategy
- Hopewell's on balance sheet net debt to on balance sheet EBITDA (excluding contributions from property development) exceeding 6.0x (End-FY13: 3.0x)
- A fund from operations (FFO) adjusted net leverage (with proportionate project debt at toll road JV and excluding contribution from property development) exceeding 7.0x. (End-FY13: 5.5x)
No positive rating action is envisaged in the medium term.