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

Hysan Development

01/09/2016 05:53

(The following statement was released by the rating agency)

HONG KONG, September 01 (Fitch) Fitch Ratings has affirmed Hong Kong-based Hysan 
Development Company Limited's (Hysan) Long-Term Issuer Default Rating (IDR) 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, and its prudent financial management, which are 
evident from its low leverage and robust coverage ratio. Hysan's ratings are 
constrained by its smaller scale compared with other Hong Kong property 
investment companies in the 'A' rating category.

KEY RATING DRIVERS

Stable Recurring Rental Income: Hysan's mature investment property portfolio 
generates stable rental income (HKD3.4bn in 2015 and HKD3.5bn in 12 months to 
June 2016) and was valued at HKD70bn at mid-2016. Fitch believes its shopping 
centres are more resilient because it caters to domestic shoppers at a time when 
mainland visitors are significantly declining. Foot traffic for Hysan's retail 
portfolio increased by around 5% in 1H16 compared with the same period in 2015. 
We expect the office leasing business to remain solid given limited supply and 
firm demand from China financial entities, especially for Grade-A offices in 
Hong Kong.  

Clear Positioning of Each Hub: Hysan has different branding strategies for each 
of its retail properties - 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. Each hub attracts a 
different set of consumers and expands Hysan potential consumer base for its 
retail space.

Prudent Financial Management Continues: Hysan does not have secured borrowings 
on its balance sheet. It increased the portion of fixed-rate debt in its total 
borrowing to above 90% at end-2015 and end-June 2016, from 76% at end-2014. It 
also maintained a stable long maturity profile of 5.8 years at end-June 2016 
(end-2015: 6.3 years). Hysan's leverage, as measured by net debt/investment 
portfolio value, remained low at 3.3% at mid-2016 and 2.9% at end-2015, down 
from 4.1% at end- 2014. These metrics compare favourably with those of its Hong 
Kong peers. Fitch expects Hysan's leverage to stay at 4%-5% over the next two to 
three years.

Redevelopment on Track: The redevelopment of Sunning Plaza and Sunning Court 
(Lee Garden Three) started in early 2014. The approximately 460,000 square foot 
redevelopment requires capex of HKD2.0bn-2.5bn and is expected to be completed 
in late-2017. Around HKD170m (about 5% of Hysan's total revenue) of rental 
income will be forgone a year during the redevelopment. Fitch believes that the 
Sunning redevelopment will have minimal impact on Hysan's strong leverage and 
coverage levels, which will continue to be underpinned by its other 
well-established properties. 

The enhancement of facilities at Lee Garden One is also on track and was 
completed in 1H16, creating additional shop space of around 10,000 square feet. 
The company will further improve access to the office and retail areas by 
building tunnels and footbridges between buildings in its Lee Garden hub. The 
renovation of parts of its residential property, Bamboo Grove, is also ongoing, 
leading to the drop in occupancy rate to 89% as of end-June 2016 from 97% as of 
end-2014. However, the renovation barely affected the company's overall 
performance as the residential segment accounted for less than 10% of revenue in 
last three years.

Scale Constrains Ratings: Hysan's ratings are constrained by its smaller scale 
compared with other Hong Kong property investment companies in the 'A' rating 
category. Hysan's investment property EBITDAR of HKD2.8bn in 2015 was much less 
than Hongkong Land Holdings Limited's (A/Stable) HKD7.8bn, Wharf (Holdings) 
Limited's (A-/Stable) HKD16.5bn and Sun Hung Kai Properties Limited's (A/Stable) 
HKD26.2bn.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

- Low double-digit increase in rental reversion for office, and low single-digit 
increase for retail in 2016-2017;

- Occupancy rate of 96% for office, and 99% for retail and 89% for residential 
properties;

- Capex of HKD1.2bn-1.5bn to cover general maintenance capex and redevelopment 
of Lee Garden Three over the next two years;

- Lee Garden Three to open in 2018, with occupancy rates of 50% for office and 
33% for retail during the first year of operation.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative 
rating action include:

- Sustained deterioration of investment property EBITDA/gross interest coverage 
below 4.0x (12 months to June 206: 14.5x; 2015:13.8x)

- Net debt/investment property asset value exceeding 30% on a sustained basis 
(1H16: 3.3%; 2015: 2.9%)

- Change in business mix away from investment property

Positive Rating Guidelines: Fitch does not envisage any positive action. Hysan's 
relatively small and geographically concentrated investment property portfolio 
poses a constraint to its credit rating.

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

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: 
wailun.wan@fitchratings.com.

Additional information is available at www.fitchratings.com

Applicable Criteria 

Corporate Rating Methodology - Including Short-Term Ratings and Parent and 
Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

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