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Fitch Affirms CK Hutchison Holdings at 'A-'; Outlook Stable
July 10, 2017 / 8:16 AM / 3 months ago

Fitch Affirms CK Hutchison Holdings at 'A-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, July 10 (Fitch) Fitch Ratings has affirmed CK Hutchison Holdings Limited's (CKHH) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, and foreign-currency senior unsecured rating at 'A-'. A full list of rating actions is at the end of this release. KEY RATING DRIVERS Diversified Business, Stable Cash Flow: CKHH's ratings reflect its strong business profile, geographical diversification and stable cash flow generation from its high-quality ports, retail, infrastructure, energy and telecommunications businesses. No single business division accounts for more than 40% of EBITDA. The infrastructure and ports businesses provide visible, recurring cash flows. Capital Intensive Business: CKHH's ports, infrastructure and telecommunications businesses are capital intensive and push up leverage, which constrains the overall ratings. There is also an element of structural subordination of cash flows, especially in the utilities and infrastructure assets, given the level of debt at the asset-owning level and that the operating cash flows of these businesses can only be accessed via dividends. European Telecoms' Positive FCF: We expect CKHH's European telecom operations to remain FCF-positive in the medium term. 3 Group Europe has posted positive FCF (EBITDA after capex and licence fees) since 2014, after a number of years of cash drain. We expect a reversal in 3 Italia's negative FCF position, as it realises significant synergies from the 2016 merger between 3 Italia and VEON Ltd.'s (formerly VimpelCom Ltd, BB+/Stable) Italian operations, Wind Telecomunicazioni SpA (Wind, B+/Stable). The 50/50 venture, Wind Tre SpA, is one of Italy's largest mobile operators by subscribers, with a market share of over 35%, up from 3 Italia's 12% market share pre-merger, improving its competitiveness and profitability in a highly competitive market. Results in Line with Expectations: CKHH's financial and operating results for the year ended 2016 were broadly in line with Fitch's expectations, despite being affected by foreign-exchange movements against its reporting Hong Kong dollar currency. Reported EBITDA, stripping out currency effects, increased by 6%, with solid contributions from all businesses. Ports registered lower throughput of 3% from weaker trading volume and competition, but EBITDA margins were stable, supported by cost-efficiency measures. Retail continued to perform well, with earnings supported by organic growth in Asia, despite a fall in same-store sales, and Europe. Reported EBITDA benefitted from the performance of CKHH's infrastructure investments, led by its subsidiary, CK Infrastructure Holdings Limited (CKI, A-/Stable), although this was partly offset by weakness in the energy segment, from its associated company, Husky Energy, due to low oil prices. Stable Financial Profile: We expect FFO-adjusted net leverage to remain at or below 4.0x in 2017-2019 (2016: 3.9x), barring significant debt-funded acquisitions or a rise in the dividend pay-out ratio. Reported financial performance is exposed to currency-volatility effects, as seen in 2015 and 2016. CKHH mitigates such risks by broadly matching the denomination of debt with the currency of underlying assets. Zero dividends from Husky Energy have been factored into our 2017-2018 forecasts, given cash-flow management initiatives in a low oil and gas price environment. Strong Liquidity, Access to Funding: CKHH's ratings are supported by its robust liquidity profile and ease of access to capital. Fitch-adjusted cash and cash equivalents, which exclude other reported liquid assets of HKD6 billion, amounted to HKD156 billion at end-2016, and debt maturities are well-laddered. CKHH has strong access to capital markets. DERIVATION SUMMARY CKHH's ratings are supported by its diversified business - by geography and segment - providing it with stable cash flows and supporting its strong business profile. There are few peers with similar business models as CKHH is a conglomerate with infrastructure, ports, retail and telecoms segments. However, CKHH is somewhat comparable to CLP Holdings Limited (CLPH, A/Stable) although CLPH - an integrated and largely regulated utility (through its key Hong Kong business CLP Power Hong Kong Limited (A/Stable) - has a stronger business profile, and historically a more robust financial profile. KEY ASSUMPTIONS - Moderate Fitch-adjusted revenue growth in 2017-2018 - Fitch-adjusted EBITDA margins of 20%-25% in 2017-2018 (2016: 24%) - No dividends from Husky Energy or Wind Tre in 2017-2018 - Dividend pay-out ratio of around 30% in 2017-2018 - Acquisitions in 2017 include investment in Duet (via CKI) and acquisition of UK Broadband. No major acquisitions or disposals in 2018 RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage exceeding 4.0x on a sustained basis; - Substantially negative free cash flow after acquisitions and disposals; - Significant changes in business mix and capital structure management adverse to its credit risk profile; - A weakening quality or decreased quantity of recurring cash flows. Positive: Developments that may, individually or collectively, lead to positive ration action include: Provided the business profile of CKHH remains unchanged: - FFO-adjusted net leverage of 3.0x or less on a sustained basis; and - Positive free cash flow after acquisitions and dividends on a sustained basis FULL LIST OF RATING ACTIONS CK Hutchison Holdings Limited Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Senior unsecured rating affirmed at 'A-' CK Hutchison Capital Securities (17) Limited Ratings on subordinated bonds affirmed at 'BBB' CK Hutchison International (17) Limited Ratings on all senior unsecured bonds affirmed at 'A-' CK Hutchison International (16) Limited Ratings on all senior unsecured bonds affirmed at 'A-' CK Hutchison Finance (16) (II) Limited Ratings on all senior unsecured bonds affirmed at 'A-' CK Hutchison Finance (16) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa Europe Finance (12) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa Finance (CI) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa Finance UK PLC Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (03/33) Limited Ratings on senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (09) Limited Ratings on senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (09/19) Limited Ratings on senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (11) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (12) (II) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa International (14) Limited Ratings on all senior unsecured bonds affirmed at 'A-' Hutchison Whampoa Europe Finance (13) Limited Ratings on subordinated bonds affirmed at 'BBB' Hutchison Whampoa Finance (14) Limited Ratings on senior unsecured bonds affirmed at 'A-' Contact: Primary Analyst Isabelle Katsumata Senior Director +65 6796 7226 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Renee Lam Director +852 2263 9971 Committee Chairperson Jeong Min Pak Senior Director +82 2 3278 8360 Summary of Financial Statement Adjustments - Fitch adjustments include Fitch-adjusted EBITDA, which is reported EBITDA, less EBITDA contribution from associates and JVs, plus dividends from associates and JVs. 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