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Fitch Rates Nan Fung's Proposed USD Senior Notes 'BBB(EXP)'
September 25, 2017 / 9:09 AM / in 22 days

Fitch Rates Nan Fung's Proposed USD Senior Notes 'BBB(EXP)'

(The following statement was released by the rating agency) HONG KONG, September 25 (Fitch) Fitch Ratings has assigned Nan Fung Treasury Limited's proposed US dollar senior notes a 'BBB(EXP)' expected rating. Nan Fung Treasury is a wholly owned subsidiary of Nan Fung International Holdings Limited (Nan Fung; BBB/Stable). The notes are rated at the same level as Nan Fung's senior unsecured rating because they are guaranteed by the company. The final rating is subject to the receipt of final documentation conforming to information already received. Hong Kong-based Nan Fung's ratings are supported by its stable rental income and recurring income from its investment property portfolio, which provide sufficient recurring income coverage for the current rating. Fitch expects Nan Fung's financial position to remain solid and its liquidity robust after factoring in the company's development expenditures and capex over the medium term. KEY RATING DRIVERS Sufficient Interest Coverage: Nan Fung's stable recurring income streams are generated from its investment properties, financial investments and hotel operations. Fitch expects recurring EBITDA from these segments to remain at about HKD2.0 billion annually over the next three years. This is supported by mature investment properties in Hong Kong and the addition of investment properties in China, such as the assets of the Forterra Trust, The Shanghai Mart, and The Place and Langham Place at Guangzhou. Fitch expects Nan Fung's recurring EBITDA interest coverage to stay above 2.0x (2.4x at end-March 2017) as its China investment-property rental income increases, which supports its rating. Smaller Operating Scale: Nan Fung's rating is constrained by its investment-property portfolio, which is small compared with that of higher-rated property peers. Nan Fung's investment property and hotel portfolio totalled 9.5 million square feet (sf) at end-March 2017 and generated EBITDA of HKD1.3 billion for the financial year ended March 2017 (FY17). It had 2.2 million sf of completed investment properties in Hong Kong at end-March 2017 (same as a year earlier) and 7.3 million sf in China (6.8 million sf a year earlier). The size of the company's Hong Kong investment properties and the income from them are likely to remain stable, but Fitch expects those of Nan Fung's properties in China to expand in the next two to three years, which will support the rating. Ample Liquidity Supports Expansion: The company had cash of HKD20.7 billion at end-March 2017 (excluding financial assets), and diversified and sizeable liquid financial assets valued at HKD18 billion. Fitch expects Nan Fung to use its cash on hand to fund the acquisition of a commercial development site in Hong Kong's Kai Tak Development Area. We therefore do not expect Nan Fung's credit metrics to deteriorate significantly following the settlement of the land cost, thanks to its solid financial profile and strong contracted sales inflows. The potential annual rental EBITDA of HKD0.8 billion-0.9 billion from the project, which is due to be completed in or after 2022, will also support the ratings. Established Market Position: Nan Fung has 50 years of experience in developing residential and commercial properties in Hong Kong. The company has demonstrated the ability to maintain a healthy credit profile through economic cycles, aided by its strong capital structure, which allows operational flexibility in terms of the timing of investments. Nan Fung's prudence is reflected in its highly liquid financial profile, low financial leverage and investment-property portfolio that has been funded mainly via internally generated funds. DERIVATION SUMMARY Nan Fung's rating is driven by its stable rental income from investment properties and EBITDA income from investments in Hong Kong, which provide sufficient interest coverage of above 2x for the current rating. Recurring EBITDA (from its investment properties, and dividends and coupons from investments) is lower than that of Hysan Development Company Limited (BBB+/Stable) and other higher-rated peers, which constrains its rating. Nan Fung's investment property EBITDA and recurring EBITDA are only about one-third and two-thirds, respectively, that of Hysan's. Nan Fung's recurring EBITDA interest coverage of 2.3x in FY17 was also lower than that of Hysan and other higher-rated peers, which had recurring EBITDA interest coverage ratios of above 4x. However, Nan Fung has sizeable liquid financial assets and cash that exceed its total debts as at FYE17, while Hysan and other higher-rated peers were in net debt positions as at end-1H17. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Nan Fung include: - Property development gross margins of 15%-45% for FY18-19 - Investment-property gross margins of 70%-80% for FY18-19 - Hotel business gross margins around 50% for FY18-19 - Total debt of HKD22 billion-26 billion for FY18-19 RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include: - Nan Fung's investment-property division accounting for a substantial portion of the company's assets and EBITDA. - Maintenance of a strong financial position such that the combination of its financial assets and cash levels exceeds total debt. - Nan Fung's investment-property EBITDA (rental and management fees) to gross interest expenses (including capitalised interests) exceeding 2x on a sustained basis (end-March 2017: 1.0x) Future developments that may, individually or collectively, lead to negative rating action include: - Nan Fung's recurring EBITDA (from its investment properties, and dividends and coupons from its investment portfolio) to gross interest expense (including capitalised interest) remaining lower than 2x on a sustained basis (end-March 2017: 2.4x). - Significant weakness in prices in the Hong Kong and China property markets. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 2 February 2017 Summary of Financial Statement Adjustments - Available cash includes adjustments of financial investments with 70% of its investment-grade fixed-income investment and 40% of its other financial investments treated as available cash. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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