June 8, 2015 / 7:53 AM / 2 years ago

Fitch Affirms Lai Fung at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, June 08 (Fitch) Fitch Ratings has affirmed Lai Fung Holdings Limited's (Lai Fung) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed Lai Fung's senior unsecured rating at 'BB-'. The full list of rating actions is at the end of this commentary. The rating affirmation is based on Lai Fung maintaining a low level of leverage and stable growth in rental income. It also takes into consideration that there will be enough debt headroom for Lai Fung to develop its flagship project in Hengqin, a city in southern China that is close to Macau. KEY RATING DRIVERS Prudent Financial Management: Lai Fung has been able to maintain low leverage in the past three years, mainly because property development supplements its main business in property leasing. With only 6.0m sq ft of gross floor area (GFA) of residential space in its land bank as at January 2015, Lai Fung is not active in the land market; instead, it progressively sells homes at projects that were mostly acquired several years ago at lower costs. The sale proceeds are used to support the expansion of its investment property portfolio, which is Lai Fung's main goal. Management aims to expand its rental portfolio to 6.7m sq ft in 2018 from 2.8m sq ft currently. Hengqin Project a Long-Term Positive: The Hengqin Creative Culture City project will be a sizeable investment for Lai Fung. We expect the development of this project to increase Lai Fung's leverage in the short to medium term, but it will become another important source of recurring income in the long term and contribute significant sellable resources in the medium term. Lai Fung will need to spend around CNY2.4bn for its 80% stake in Phase 1 of the project, which will require a total investment of CNY3bn, including the land cost. Construction of this project is scheduled to start in 2H15. Concentration of Rental Income: Hong Kong Plaza in Shanghai accounted for over 60% of Lai Fung's gross rental revenue in the financial year ended 31 July 2014 (FY14) and 1HFY15. Although Shanghai Hong Kong Plaza benefited from a surge in rental income after a new food and beverage area was created in FY14, we expect the economic slowdown and increasing competition from online shopping to limit rental upside. Shanghai Hong Kong Plaza will account for about 50% of Lai Fung's rental revenue in FY16-17 as the company completes additional investment properties. Residential Projects in Prime Cities: Lai Fung holds residential property projects in Shanghai, Guangzhou and Zhongshan, where the housing oversupply is small. The projects in Shanghai and Guangzhou are situated in prime areas, which lead to satisfactory profit margins. Lai Fung's gross profit margins were above 40% in the past three years and may widen in the next 12 months as its high-end projects in Shanghai and Guangzhou take up a bigger share of presales. We believe Lai Fung has no intention to expand its property development business substantially, and is likely to sell its inventory gradually. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Weak growth in China's retail sector in 2015, resulting in low single-digit percentage rental growth at Lai Fung's Shanghai Hong Kong Plaza. - Average selling price for its development properties to increase slightly in FY15 and FY16, and be stable in the future. - Contracted sales in FY15 and FY16 to be higher than in FY14 as more projects are completed, which will boost the sellable GFA. - Lai Fung to start the construction of its Hengqin project in 2H15 and presales of the serviced apartments units to begin from FY18. RATING SENSITIVITIES Positive rating action is not expected in the next 18-24 months due to Lai Fung's small operational scale. However, future developments that may, individually or collectively, lead to positive rating action include: - EBITDA from investment properties rising above HKD600m (FY14: HKD349m, 1H FY15: HKD191m) - EBITDA for investment properties/interest expenses exceeding 1.5x (1H FY15: 1.1x) on a sustained basis Negative: Future developments that may, individually or collectively, lead to negative rating action include: - EBITDA for investment properties/interest expenses falling below 1.0x on a sustained basis - Total debt/property assets exceeding 40% (26% at end-FY14 and at end-1H FY15) on a sustained basis - Increase of development assets to above 25% of total property assets (14% at end-FY14 and 13% at end-1H FY15) FULL LIST OF RATING ACTIONS Long-Term Foreign-Currency IDR Affirmed at 'BB-', Outlook Stable Long-Term Local-Currency IDR Affirmed at 'BB-', Outlook Stable Foreign-currency senior unsecured rating affirmed at 'BB-' Local-currency senior unsecured rating affirmed at 'BB-' CNY1.8bn senior unsecured notes due 2018 affirmed at 'BB-' Contact: Primary Analyst Jenny W Huang Associate Director +852 2263 9922 Fitch Ratings (Hong Kong) Limited 28 Fl, Tower Two, Lippo Centre Admiralty, Hong Kong Secondary Analyst Su Aik Lim Senior Director +852 2263 9914 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) here Related Research China Homebuilders: Ratings Navigator Companion [862256 - 02-MAR-2015] here Additional Disclosures Solicitation Status here <a href="https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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