August 30, 2017 / 11:12 AM / in a year

Fitch Affirms Hysan Development Company at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 30 (Fitch) Fitch Ratings has affirmed Hong Kong-based Hysan Development Company Limited's Long-Term Issuer Default Rating at 'BBB+'. The Outlook is Stable. Fitch has also affirmed Hysan's senior unsecured rating and the rating on senior unsecured notes issued by Hysan (MTN) Limited at 'BBB+'. The rating affirmation is based on the stable performance of Hysan's Hong Kong investment property portfolio, especially its office assets, and its prudent financial management, which is evident from its low leverage and robust coverage ratio. Hysan's ratings are constrained by its relatively small scale compared with other Hong Kong property investment companies in the 'A' rating category. KEY RATING DRIVERS Stable Recurring Rental Income: Fitch expects Hysan to record flat rental revenue growth in 2017. We estimate that Hysan's retail rental income is likely to record a low single-digit decrease in 2017 due to negative rental reversions as it reshuffles some tenants towards food and beverage. However, this should be offset by the resilient performance of its office portfolio, which continues to book positive reversions in the high teens. Hysan's mature investment property portfolio, valued at HKD70 billion in mid-2017, generated stable rental income of HKD3.6 billion in the year to end-June 2017 (2016: HKD3.5 billion). Its shopping centres recorded flat revenue growth of -0.1% in 1H17 (2016: 3.5%) amid Hong Kong's subdued retail environment. However, its office leasing business was solid, with revenue growth of 5.8% in 1H17 (2016: 3.9%), due to limited supply and firm demand from Chinese financial entities, especially for grade-A offices. Clear Hub Positioning: Hysan has different branding strategies for each retail property - Hysan Place is aimed at the hip and trendy, Lee Gardens targets the luxury shopper and Lee Theatre is geared towards mass market, urban fashion and sporty lifestyle shoppers. This positioning helps expand Hysan's retail consumer base. Prudent Financial Management: Hysan does not have secured borrowings on its balance sheet. Its portion of fixed-rate debt in its total borrowing stayed at 73% at end-2016. The company also maintained a stable and long maturity profile of 4.8 years at end-June 2017 (end-2016: 4.3 years). Hysan's leverage, as measured by net debt/investment portfolio value, remained low at 4.3% in mid-2017 (end-2016: 5.3%). These metrics compare favourably with those of its Hong Kong peers. Fitch expects Hysan's leverage to stay at 4%-5% in the short to medium term. Redevelopment on Track: The redevelopment of Sunning Plaza and Sunning Court (Lee Garden Three) is scheduled to be completed in late-2017, when Lee Garden Three should also start operations. The redevelopment, which started in early 2014, requires capex of HKD2.0 billion-2.5 billion. Offices account for more than 80% of the approximately 470,000 square feet of gross floor area, among which half of the office space has received rental commitments as of end-June 2017. Fitch expects Lee Garden Three to start contributing to revenue from 2018, supported by solid demand for office space in the Causeway Bay area. The partial renovation of its residential property, Bamboo Grove, is also ongoing, leading to a drop in the occupancy rate to 84% as of end-June 2017 (2016: 82%), from 97% at end-2014 - before the renovation began. However, the renovation barely affects the company's overall performance, as the residential segment has contributed less than 10% of revenue during the previous three years. Scale Constrains Ratings: Hysan's ratings are constrained by its relatively small scale compared with other Hong Kong property investment companies in the 'A' rating category. Hysan's investment property EBITDA of HKD2.9 billion in 2016 was much less than Hongkong Land Holdings Limited's (A/Stable) HKD6.2 billion, The Wharf (Holdings) Limited's (A-/Positive) HKD12.6 billion and Sun Hung Kai Properties Limited's (A/Stable) HKD13.4 billion. DERIVATION SUMMARY Hysan's ratings are supported by its prudent financial management and resilient rental income from its investment properties in Hong Kong's Causeway Bay area. Hysan's investment property interest coverage of 15.7x in 2016 is the highest among Fitch-rated Hong Kong landlords, which ranges from 1.8x to 7.2x. Its leverage of 5.3% as of end-2016 was also lower than that of most peers, which booked above 7.0%. Hysan's ratings are constraint by its relatively small scale. Its investment property EBITDA is higher than that of Nan Fung International Holdings Limited (BBB/Stable), but lower than that of other higher-rated peers, such as Wharf and Hongkong Land. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Negative retail rental version of -15% to -10% in 2017-2018; positive office rental reversion of 20% to 15%; - Occupancy rate of 96% for office, 99% for retail and 86% for residential properties in 2017; - Capex of around HKD600 million-850 million to cover general maintenance and the Lee Garden Three redevelopment over the next two years; and - Lee Garden Three to complete its redevelopment and open in late-2017 as scheduled. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Fitch does not envisage positive action. Hysan's small and geographically concentrated investment property portfolio constrains its credit rating. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Deterioration of investment property EBITDA/gross interest coverage below 4.0x for a sustained period (last 12 months to 1H17: 15.2x; 2016: 15.7x) - Net debt/investment property assets exceeding 30% for a sustained period (1H17: 4.3%; 2016: 5.3%) - Change in business mix away from investment property LIQUIDITY Ample Liquidity, Financial Flexibility: The company's cash and bank balances, including time deposits, stood at HKD3.4 billion as at end-June 2017 (end-2016: HKD2.6 billion), well-covering its short term debt of HKD150 million. Hysan also maintains committed undrawn facilities amounting to HKD750 million as at end-June 2017. The company's investment properties totalled HKD69.6 billion as at end-June 2017, giving rise to additional financial flexibility. Unsecured Borrowing, Note Dominated: All of Hysan's borrowings are on an unsecured basis. Debts sourced from capital markets remained high at 72.6% at end-June 2017 (end-2016: 73.4%). Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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