January 5, 2018 / 2:54 AM / 6 months ago

Fitch Rates Lai Fung's Proposed USD Senior Notes 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG, January 04 (Fitch) Fitch Ratings has assigned Lai Fung Holdings Limited's (BB-/Stable) proposed US dollar senior notes a 'BB-(EXP)' expected rating. The notes are rated at the same level as Lai Fung's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received. Lai Fung's ratings are supported by its stable financial profile with investment-property (IP) EBITDA/gross interest ratio at 1.6x and total debt-to-total property asset at 33.5% at 31 July 2017, both similar to levels a year earlier. Furthermore, Fitch expects Lai Fung's IP EBITDA interest cover to remain above 1x due to its new Guangzhou Lai Fung Tower's first full year of contribution to rental income in the financial year ended 31 July 2017 (FY17). The Chinese property company's ratings are constrained by its small IP EBITDA of around USD60 million, material exposure to development properties and the large amount of investment property under development with a gross floor area of 3.6 million square feet (sq ft) compared with the current 3.2 million sq ft of completed investment property in operation. KEY RATING DRIVERS Prudent Financial Management: Lai Fung has maintained neutral to positive operating cash flow by focusing on generating a healthy profit margin in its development-property business to support the development of new investment properties between 2011 and 2017. Lai Fung's leverage, as measured by total debt/total property assets, remained less than 30% after it peaked in FY13, as it raised funds in the equity market and maintained stable cash flows from property sales. Between FY15 and FY17, the gross floor area (GFA) of development property projects available for sale fell to around 2 million sq ft (excluding joint-venture projects) from 5.9 million sq ft. Hengqin Project Long-Term Positive: The Hengqin Novotown project will become an important source of recurring income after completion in 1HFY19 and will likely push total IP EBITDA above HKD600 million when the project matures after FY20. The sale of cultural-themed properties may generate sales of about HKD1 billion to support the development of this project from FY18. We expect the development of this project to increase Lai Fung's leverage to above 30% in the short to medium term, but leverage will still be below the threshold where Fitch could consider negative rating action. Lai Fung will need to spend another HKD2 billion in Phase 1 of the project, which is on track. Construction started in 2HFY15 and the company has signed license agreements that cover about 60% of the project's culture and hospitality-themed GFA of around 1.5 million sq ft. Reducing Concentration of Rental Income: Fitch expects Shanghai Hong Kong Plaza, Lai Fung's flagship investment property, to account for less than 50% of the company's rental revenue by FY19, from about 60% currently. The decline will result from the addition of new investment properties. We expect Lai Fung's mature investment properties to have rental growth in the mid- to low-single digits and achieve a stable EBITDA margin of around 62%. Its already-high occupancy of above 95% for most of its key office and retail properties means that further rental revenue upside will mainly be driven by positive rental reversion. Lower Contribution from Residential Projects: Lai Fung's sales of development properties will be mainly driven by the Palm Spring project in Zhongshan city in Guangdong province. Lai Fung's gross profit margin for development property has been above 40% since FY09, except for FY11, and we expect this margin to be sustained in the next two to three years, underpinned by the stable or rising selling price of the Palm Spring project. Lai Fung's 3.5 million sq ft of saleable GFA of development properties will last until FY21 or FY22 based on the current construction schedule. We have assumed in our analysis that Lai Fung will acquire development-property projects every two to three years. DERIVATION SUMMARY Lai Fung's shopping malls and offices enjoyed healthy occupancy of over 90% and high single-digit rental rate growth. Its IP EBITDA/gross interest cover has been above 1.2x; setting it apart from most Chinese homebuilders that rely on more risky development-property sales to service their debts. Lai Fung has a significantly stronger financial profile than Golden Wheel Tiandi Holdings Company Limited (GWTH, B/Stable), which is also focused on investment properties. GWTH's IP EBITDA/gross interest coverage was only 0.5x at end-2016, lower than Lai Fung's 1.6x. Lai Fung's leverage is also lower than 'BB' rating category peers' leverage of between 30% and 40%. Lai Fung's small IP EBITDA of around USD60 million in FY17 and material exposure to development property risks constrain its ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Replenishes development-property land bank over a three-year sales cycle - Mid- to low-single-digit rental rate growth - IP GFA growth according to management guidance as per interim report - Capex and dividend for FY17 and FY18 similar to FY16 level - Hong Kong dollar at 1.15 to Chinese yuan over FY17-FY19 RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - Annual EBITDA from investment properties rising above HKD600 million (FY16: HKD381 million, FY17: HKD549 million) and EBITDA from investment properties/interest expenses exceeding 1.5x on a sustained basis (FY16: 1.3x, FY17: 1.6x) Developments that may, individually or collectively, lead to negative rating action include: - EBITDA from investment properties/interest expenses falling below 1.0x on a sustained basis, or - Total debt/property assets exceeding 40% on a sustained basis (FY16: 28.9%, FY17: 33.5%) LIQUIDITY Sufficient Liquidity: Lai Fung has maintained enough cash to cover its short-term debt expiring in the past. It had approximately HKD2 billion of cash on hand and undrawn credit facilities of HKD3.7 billion at 30 November 2017, which were sufficient to meet its short-term bank loans of HKD18 million and offshore yuan-denominated senior notes of CNY1.8 billion due April 2018. Lai Fung's growing recurring EBITDA of over HKD400 million will also provide steady cash flow to support its debt servicing. Contact: Primary Analyst Ricky Lam Associate Director +852 2263 9991 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Silvia Fun Associate Director +852 2263 9975 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 31 May 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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