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

Lai Fung Holdings

09/10/2018 04:28

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-October 08: Fitch Ratings has affirmed Lai Fung Holdings 
Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 
'BB-' with Stable Outlook. Fitch has also affirmed the Hong Kong property 
company's senior unsecured ratings and the rating on its USD350 million senior 
notes due 2023 at 'BB-'. 

The affirmation is supported by Lai Fung's stable financial profile with 
investment-property (IP) EBITDA/gross interest ratio of 1.4x and total 
debt-to-total property assets at 27% at 31 July 2017, both similar to levels a 
year earlier. Fitch expects Lai Fung's IP EBITDA interest cover to remain above 
1.2x due to the stable demand for office buildings in Tier 1 cities in China, 
mainly Shanghai and Guangzhou. Lai Fung is likely to start leasing out Hengqin 
Novotown Phase I in the financial year ending 31 July 2019 (FY19), and has plans 
to redevelop an investment property in Shanghai, which may improve its IP EBITDA 
interest cover.  

The company's ratings continue to be constrained by its small IP EBITDA of 
around USD60 million, and the large amount of IP under development amounting to 
gross floor area (GFA) of 3.3 million square feet (sq ft) compared with the 3.3 
million sq ft of completed investment property in operation.

KEY RATING DRIVERS

Prudent Financial Management: Lai Fung maintained neutral to positive funds flow 
from operations in FY15-FY17 as it focused on healthy profit margins in the 
development business to support development of new IP. Lai Fung's leverage, 
measured by total debt/total property assets, remained under 30% in FY15-FY17, 
although it rose to 35% in 1HFY18 as it raised debt for refinancing and 
maintained stable cash inflow from property sales. Lai Fung's GFA of development 
property available for sale fell to around 2 million sq ft (excluding 
joint-venture projects) in FY17 from 5.9 million sq ft in FY15, as it has not 
acquired any land for property development.

Hengqin Project a Long-Term Positive: The Hengqin Novotown project will become 
an important source of recurring income after completion in 1HFY19 and is likely 
to push total IP EBITDA above HKD600 million when the project matures after 
FY20. The sale of its planned serviced apartment units may generate around HKD1 
billion to support the development of this project in FY18-19. We expect the 
investments to develop this project to raise Lai Fung's leverage to about 30% in 
the short to medium term, though this would still below the threshold where 
Fitch could consider negative rating action. 

More Diversified Rental Income:  Fitch expects Shanghai Hong Kong Plaza, Lai 
Fung's flagship investment property, to account for less than 50% of the 
company's rental revenue by FY19, from about 60% currently. The decline will 
result from the addition of new investment properties. We expect Lai Fung's 
mature investment properties to have rental growth in the mid- to low-single 
digits and achieve a stable EBITDA margin of around 62%. Its already-high 
occupancy of above 95% for most of its key office and retail properties means 
that further rental revenue upside will mainly be driven by positive rental 
reversion.

Residential Profitability to Recover: Lai Fung's contracted sales from 
development properties will be mainly driven by the Palm Spring project in 
Zhongshan and the sale of serviced apartment units in Hengqin Novotown in FY18 
and FY19. Lai Fung's gross profit margin for the property development business 
has been above 40% since FY12, except for FY17 as profit recognition was mainly 
from the Zhongshan project that had lower profit margin than other projects. 

We expect gross profit margin to recover to above 30% in the next two to three 
years, underpinned by better margins for Hengqin Novotown the Wuliqiao project 
in Shanghai. Lai Fung's 3 million sq ft of GFA of development property available 
for sale at 31 January 2018 will last until FY21 or FY22, based on the current 
construction schedule. 

DERIVATION SUMMARY

Lai Fung's shopping malls and offices enjoyed healthy occupancy of over 90% and 
rental growth in the high single digits. Its IP EBITDA/gross interest cover has 
been above 1.2x; setting it apart from most Chinese homebuilders that rely on 
more risky development property sales to service their debt. Its small IP EBITDA 
of around USD60 million and significant exposure to property-development risks 
constrain its ratings.

Lai Fung has significantly stronger financial profile compared with similar 
companies focused on investment properties, such as Golden Wheel Tiandi Holdings 
Company Limited (GWTH, B/Stable) and Nanjing Jinsheng International Household 
Market Operating and Management Co., Ltd. (Jinsheng, B+/Stable). GWTH's IP 
EBITDA/gross interest coverage is only 0.5x. Jinsheng's IP EBITDA/gross interest 
coverage is 1.2x and it has higher leverage of 50%.  Lai Fung's leverage is also 
lower than 'BB' rating category peers' leverage of between 30% and 40%, as 
measured by net debt/adjusted inventory.

KEY ASSUMPTIONS

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

- Mid-to-low single-digit rental growth

- IP GFA growth of about 30% in FY19 and 25% in FY20

- Capex and dividend for FY18 and FY19 similar to FY17 level

- Hong Kong Dollar (HKD) at 1.15 to Chinese yuan (CNY) over 2018-2020

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Positive 
Rating Action

- IP EBITDA above HKD600 million (1HFY18: HKD257 million) and IP EBITDA 
/interest expense exceeding 1.5x (1HFY18: 1.7x) for a sustained period 

Future Developments That May, Individually or Collectively, Lead to Negative 
Rating Action 

- IP EBITDA /interest expense sustained below 1.0x, or

- Total debt/property assets exceeding 40% for a sustained period (1HFY18: 35%)

LIQUIDITY

Sufficient Liquidity: Lai Fung has consistently maintained enough cash to cover 
its short-term debt. It had HKD4.0 billion of cash on hand, which is sufficient 
to cover its short-term bank loans of HKD2.5 billion as of 31 January 2018. In 
January 2018, Lai Fung issued USD350 million of 5.65% guaranteed notes due 2023 
to refinance its CNY1.8 billion offshore Chinese yuan senior notes due April 
2018. Lai Fung's growing recurring EBITDA of over HKD400 million will also 
provide steady cash flow to support its debt servicing. 

FULL LIST OF RATING ACTIONS

Lai Fung Holdings Limited

-    Long-Term Foreign- Currency IDR affirmed at 'BB-', Stable Outlook; 

-    Long-Term Local-Currency IDR affirmed at 'BB-', Stable Outlook;

-    Foreign-currency senior unsecured ratings affirmed at 'BB-';

-    Local-currency senior unsecured ratings affirmed at 'BB-';

-    USD350 million 5.65% senior notes due 2023 affirmed at 'BB-'.

Contact: 

Primary Analyst 

Rebecca Tang

Associate Director

+852 2263 9933 

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Jackson Hui

Associate Director

+852 2263 9993 

Committee Chairperson

Su Aik Lim

Senior Director

+852 2263 9914

Summary of Financial Statement Adjustments - Only interest-bearing loans, which 
are from joint ventures, are included in gross debt to better compare with the 
gross debt of peers that use non-interest bearing funding from project partners.

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 Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 16 Apr 2018)

https://www.fitchratings.com/site/re/10026835

Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

https://www.fitchratings.com/site/re/10036366

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10047510

Solicitation Status 

https://www.fitchratings.com/site/pr/10047510#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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