June 2, 2017 / 4:36 AM / 3 months ago

Fitch Upgrades Cheung Kong Property to 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, June 02 (Fitch) Fitch Ratings has upgraded Hong Kong-based Cheung Kong Property Holdings Limited's (CKP) Long-Term Foreign-Currency Issuer-Default Rating (IDR) to 'A' from 'A-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. The upgrade reflects CKP's strong financial position, as measured by net debt/recurring EBITDA of below 2x (including EBITDA from investment properties, aircraft leasing and distributions from REITs), which is comparable to 'A'-rated landlords based in Hong Kong. The company's recurring income can cover cash interest expense of over 4.5x. Fitch also considered CKP's prudence in land acquisitions in Hong Kong amid high land costs, and additional recurring income from its overseas acquisitions. KEY RATING DRIVERS Solid Rental Income: CKP generated HKD7.3 billion in rental income in 2016 (2015: HKD4.9billion) mainly through its high-grade Hong Kong investment property portfolio. The properties were valued at HKD125 billion at end-2016, which was 14.5x its net debt of HKD8.6 billion, and enjoyed an operating margin of 92%. Fitch expects positive rental reversions for CKP's office portfolio, as these properties are mostly located in the central district, where supply will remain tight in 2017. CKP was formed from the spin-off of the property businesses of CK Hutchison Holdings Limited. Results for 2015 are based on the property portfolio held by CK Hutchison Holdings Limited for the full year and the property portfolio previously held by Hutchison Whampoa Limited for seven months. Hotel Margins Stabilised: The company's hotel portfolio generated HKD4.8 billion in revenue in 2016 (2015: HKD3.8billion). The Hong Kong hotel segment, which is positioned in the mid-range and targets the mass market, had an occupancy rate of 89%. The overall operating margin remained largely stable at 31.5% in 2016, as cost-reduction measures helped to offset a decline in the average room rate. Fitch expects the margin in the hotel segment to remain stable in 2017 in view of the recovery in tourist arrivals and continued cost-control measures. Prudent Land Acquisitions: CKP has been prudent in its land acquisition and expansion strategy in Hong Kong and Mainland China while maintaining its fast-churn strategy. Fitch expects CKP to maintain this business strategy amid high land costs, which will result in strong positive cash flow of HKD30 billion-40 billion from property development in 2017. CKP is diversifying its income sources by acquiring non-property assets to generate recurring income, which will also compensate for lower profit from property development in the long term. Diversifying Recurring Income Base: CKP made three major acquisitions in non-property segments. It acquired the aircraft leasing business from CK Hutchison Holdings Limited, participated in a joint venture to acquire DUET Group in Australia, which has gas and electricity distribution assets and gas transmission assets in Australia, and acquired Reliance Intermediate Holdings, which owns Reliance Home Comfort, the leader in residential water heater rentals in Ontario, Canada. In Fitch's view, the quality of recurring income from these acquisitions is not materially weaker than that of investment properties. Fitch expects the acquisitions of assets in industries with mature regulatory environments and stable competition to improve CKP's recurring income in the near term, which will support its credit metrics. CKP may consider more acquisitions in non-property segments, which Fitch expects to be able to generate recurring income immediately and not put pressure on its credit metrics. DERIVATION SUMMARY CKP's credit profile is well-positioned relative to peers such as Hongkong Land Holdings Limited (A/Stable) and Swire Properties Limited (A/Stable). Its investment property EBITDA scale of USD0.9 billion is between that of Hongkong Land (USD0.8 billion) and Swire Properties (USD1.0 billion). Its leverage, as defined by net debt/investment property value, at 7%, is similar to its peers' which are at 8%-15%. Its investment property EBITDA/cash interest coverage of 5x at end-2016, is also similar to the 5x-7x of its peers. CKP's recurring EBITDA (including investment property EBITDA, distributions from REITs and aircraft leasing) interest coverage of about 6x is comparable to that of its peers, while its net debt/recurring EBITDA of below 2x is better than peers which are 2x-5x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Stable rental income of about HKD8 billion in 2017-2019 - Aircraft leasing income of HKD2.0 billion-2.5 billion in 2017-2019 - Dividends and distribution of HKD1.5 billion-2.0 billion in 2017-2019 from REITs and investments in DUET Group and Reliance Intermediate Holdings - EBITDA margin of 25%-40% in 2017-2019 - Property development sale proceeds to cover expenditure and capex RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch does not envisage any positive action, as the rating is constrained by exposure to the volatile homebuilding segment. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Recurring EBITDA/gross interest expense sustained below 4.5x (2016: 6.0x) - Net debt/recurring EBITDA sustained above 3.5x (2016: 1.1x) - Significant deterioration in the quality of its recurring income LIQUIDITY CKP had a unrestricted cash balance of HKD61.5 billion at end-2016 against short-term borrowings of HKD4.4 billion. The company issued USD1.5 billion of perpetual capital securities in May 2017, which can be used to refinance part of its debt maturity due in 2018. Fitch expects CKP to maintain its reliable access to the bond and loan markets for refinancing at favourable interest cost. FULL LIST OF RATING ACTIONS Cheung Kong Property Holdings Limited -- Long-Term Issuer Default Rating upgraded to 'A' from 'A-'; Outlook Stable -- Senior unsecured rating affirmed upgraded to 'A' from 'A-' -- Rating on USD3 billion Euro medium-term note programme upgraded to 'A' from 'A-' The MTN programme is issued by CK Property Finance (MTN) Limited and guaranteed by Cheung Kong Property Holdings Limited. Contact: Primary Analyst Rebeca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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