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

Lai Fung Holdings

06/06/2016 09:21

(The following statement was released by the rating agency)

HONG KONG/SHANGHAI, June 06 (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 low leverage and stable 
growth in rental income. Its ratings are constrained by its small operating 
scale, with only two investment properties generating rental revenue of over 
HKD100m per year. These properties are subject to competitive pressures although 
they are well located. Lai Fung's flagship development project in Hengqin (an 
island near Macao) does not pressure its ratings, as debt headroom is sufficient 
to fund the project development. The enlarged scale and improved diversification 
of its income may enhance its business profile, upon successful completion of 
this project in 2019.

KEY RATING DRIVERS

Prudent Financial Management: Lai Fung maintained its low leverage, measured 
using total debt/property assets, at 26%-28% in the first half of financial year 
2016 (1HFY16) and FYE15 ending 31 July, as it staggers its property sale to 
supplement its main business of real-estate leasing. Lai Fung is not active in 
the land market, with only 6.3 million square feet (sq ft) of attributable gross 
floor area (GFA) of residential space in its land bank as at January 2016; 
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 the management aims to 
expand to 6 million sq ft in FY18 from 2.9 million sq ft as 1HFY16.

Concentration of Rental Income: Fitch expects Shanghai Hong Kong Plaza, Lai 
Fung's flagship investment property, will account for about 50% of Lai Fung's 
rental revenue in FY17-FY18 as the company completes additional investment 
properties. Shanghai Hong Kong Plaza has accounted for over 60% of Lai Fung's 
gross rental revenue since FY11 (FY15: 65%). We also expect the economic 
slowdown and intensifying competition from online shopping to limit rental 
upside, though it benefited from a surge in rental income after a new food and 
beverage area was created in FY14. 

Residential Projects in Prime Cities: Fitch estimates the gross profit margin of 
Lai Fung's development properties (DP) to stay above 40% in the medium term 
(FY15: 45%), underpinned by its quality DP portfolios. 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. We believe Lai Fung 
has no intention to expand its property development business substantially, and 
is likely to sell its inventory gradually.

Hengqin Project a Long-Term Positive: The Hengqin Creative Culture City project 
will become an important source of recurring income after completion in 1HFY19, 
and will contribute significant sellable resources from the planned serviced 
apartment units. We expect the development of this project to increase Lai 
Fung's leverage to above 30% in the short to medium term, though still below the 
threshold where Fitch would consider negative rating action. Lai Fung will need 
to spend around CNY2.4bn for its 80% stake in Phase 1 of the project. The 
development of the project is on track - construction started in 2HFY15, and the 
company had signed license agreements with some content providers.

KEY ASSUMPTIONS

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

- Weak growth in China's retail sector, resulting in flat- to low-single-digit 
percentage rental growth at Lai Fung's Shanghai Hong Kong Plaza.

- Average selling price for its development properties at HKD1,800-2,000 per sq 
ft during FY16-FY18 (FY15 ASP: HKD4,309/sq ft) with more contracted sales from 
the high-rise residential project in Zhongshan. 

- Hengqin project to complete in 1HFY19 and start to fully contribute revenue 
from FY20, 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, developments that may, individually or 
collectively, lead to positive rating action include:

- EBITDA from investment properties rising above HKD600m (FY15: HKD396m, 1HFY16: 
HKD193m)

- EBITDA for investment properties/interest expenses exceeding 1.5x on a 
sustained basis (FY15: 1.3x, 1HFY16: 1.2x)

Negative: 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% on a sustained basis (FY15: 28.4%, 
1HFY16: 26.8%) 

- Increase of development assets to above 25% of total property assets 
(FY15:16.4%, 1HFY16: 14%)

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 WJ Huang

Associate Director

+852 2263 9922

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central

Hong Kong

Secondary Analyst

Laura Long

Analyst

+86 21 5097 3019

Committee Chairperson

Su Aik Lim

Senior Director

+852 2263 9914

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
leslie.tan@fitchratings.com; 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. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr 
_id=1005616

Solicitation Status 

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005616

Endorsement Policy 

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det 
ail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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