(The following statement was released by the rating agency)
Dec 12 -
Summary analysis -- Swire Pacific Ltd. ---------------------------- 12-Dec-2012
CREDIT RATING: A-/Stable/-- Country: Hong Kong
Primary SIC: Special Purpose
Mult. CUSIP6: 870794
Credit Rating History:
Local currency Foreign currency
16-Aug-2005 A-/-- A-/--
20-May-2002 BBB+/-- BBB+/--
The rating on Swire Pacific Ltd. reflects the company's strong and stable rental income from
seasoned investment properties in Hong Kong, its diverse businesses that have good profit
records, its good liability management, and strong financial flexibility. The rating also
reflects the Swire management's willingness to use the company's asset base as a source of
financial flexibility. The Swire management's willingness to utilize the company's asset base to
deleverage was shown in 2011 when the group sold its stake in Festival Walk, a shopping mall in
Hong Kong. As a result, the company's credit ratios are comfortably within levels appropriate
for the rating.
Swire's large growth appetite, debt-funded expansion, and the volatile profitability of and
dividends from Cathay Pacific Airways Ltd. (45% owned by Swire) moderate these
Swire's credit profile benefits from the company's operating income from a large portfolio
of high quality real estate assets and other income from diverse and unrelated business
segments. However, we expect property leasing to remain the key driver of Swire's profitability
and cash flows. For the past three years, the property division accounted for about
three-quarters of the company's consolidated total assets and at least two-thirds of its
operating profit before affiliates. We therefore evaluate Swire's financial ratios based on the
company's predictable net rental income, similar to our analysis of real estate investment
In our view, the listing of Swire Properties Ltd. (A-/Stable/--; cnAA/--) in Hong
Kong early this year has had a limited impact on Swire's credit profile--partly because Swire
did not generate any cash proceeds from the listing. Currently the group's holding in Swire
Properties is 82% and the group is likely to maintain its dominant controlling-shareholder
status in exercising operational and financial strategies.
We view Swire's business risk profile as "strong." The company has a diverse business
portfolio, with each business having a good-to-strong market position. These businesses include
property development and investment, aviation, marine services, beverages, and trading and
industrial. While overexposure to property investments weighs on our business profile
assessment, we also consider the low correlation other businesses have with the property
business, and Swire's geographical diversification. With the exception of aviation, each
business has a record of generating good profitability across economic cycles.
Swire's investment property portfolio in Hong Kong underpins its business risk profile. The
company's portfolio of leasing properties is sizable and of high quality. The portfolio,
including properties in Hong Kong and China, is valued at Hong Kong dollar (HK$) 199.3 billion
as of June 30, 2012, from HK$191.5 billion six months earlier. Gross rental income from the
office portfolio improved in the period, reflecting positive rental reversion at Swire's Pacific
Place and Island East properties. Gross rental income for Swire's retail portfolio declined in
the absence of a contribution from Festival Walk. Occupancy in Swire's Hong Kong properties has
been consistently above 95%, and the portfolio could benefit from positive rental reversions due
to the limited supply of new commercial buildings in the territory. The outlook for the property
sector in Hong Kong for 2013 is somewhat clouded, due to the ongoing slowdown in the global
economy. Profitability is good; we expect Swire's property leasing margins to be above 70%, in
line with its Hong Kong peers'.
In China, Swire is making good progress with new developments and has secured satisfactory
leasing commitments for new properties. Nevertheless, in our view, compared with Hong Kong, the
Chinese market is less mature and more competitive, and poses higher execution risk. It could
take several years before tenancy rates in China stabilize and rental income becomes meaningful.
The good commercial location of Swire's properties and joint ownership with local partners
partly offset the development and operating risks.
Unpredictable distribution of Cathay's residual cash flows affects Swire's cash generation.
Cathay contributes significant cash flows to Swire through dividends. Cathay has a good brand
and niche position as a premium airline, but its operating and financial performances are
volatile. In our view, Cathay's performance--both in the cargo and passenger lines--is weak in
2012 and is highly uncertain in 2013. This is because of challenging global economic conditions
and consistently high fuel costs. Further, airline's capital expenditure is likely to remain
high due to its fleet expansion plan. As a result, we expect lower dividend contribution from
Cathay to Swire for year 2012.
We expect Swire's profitability to improve in 2012 since property trading profits are likely
to be materially higher than in 2011, albeit from a low base. We attribute the improvement to
expected revenue recognition from Swire's largely presold high margin development project,
Azura. Swire's profit margin has weakened since 2010 due to: (1) the consolidation of Hong Kong
Aircraft Engineering Co. Ltd. (not rated), which operates in a lower margin segment
than Swire; (2) higher overhead expenses on new leasing properties; and (3) continued
challenging operating conditions for marine services and beverage businesses.
The profit contribution from property trading is uncertain for 2013 because the pre-sale on
Swire's other projects has been limited. Swire's property trading business could face challenges
if the property market weakens quickly in Hong Kong following policy measures. This is because
of the company's high development cost of upcoming residential projects. Nevertheless, the risk
is manageable, in our view, because of the generally good location and small scale of Swire's
Weak performance at a number of Swire's business segments hit the company's performance in
the six months ended June 30, 2012. Its aviation business faces challenging operating
conditions. The marine and beverage division witnessed margin pressure from higher operating
costs. The recovery prospect for these business units remains uncertain.