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

Lai Fung Holdings

08/10/2019 06:17

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Shanghai-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 the 
investment property (IP) EBITDA/gross interest ratio of 1.2x and total 
debt/total property assets at 28% at 31 July 2018 - both ratios similar to 
levels a year earlier. Fitch expects Lai Fung's IP EBITDA interest cover to 
remain above 1.0x 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 2020 (FY20), 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 number of IP under development, which amounts 
to a gross floor area (GFA) of 3.3 million square feet (sq ft) compared with the 
3.3 million sq ft of completed IP in operation.

KEY RATING DRIVERS

Prudent Financial Management: Lai Fung maintained neutral to positive funds flow 
from operations in FY15-FY18 as it focused on healthy profit margins in the 
development business to support more IP development. Lai Fung's leverage, 
measured by total debt/total property assets, remained under 30%, but rose to 
32% in 1HFY19 due to the funding required for its major projects, such as 
Novotown in Hengqin and the Wuli Bridge in Shanghai, near completion. Lai Fung 
also acquired the land for Phase II of the Novotown project in December 2018.

Novotown Project a Long-Term Positive: Novotown will become an important source 
of recurring income and is likely to push total IP EBITDA above HKD600 million 
when it matures. The sale of Lai Fung's cultural studios may generate around 
HKD1 billion to support the Novotown development in FY19-FY20. We expect Lai 
Fung's leverage to stay at about 30% in the short to medium term, although this 
would be below the threshold where Fitch could consider negative rating action.

More Diversified Rental Income: Fitch expects the flagship Shanghai Hong Kong 
Plaza to account for less than 50% of the company's rental revenue by FY20, from 
50-60% in 1HFY19. The decline will result from the addition of new IP. We expect 
Lai Fung's mature IP to have rental growth in the mid- to low-single percentage 
digits and achieve a stable EBITDA margin of around 50%-60%. Its already-high 
occupancy of above 95% for most of its key office and retail properties means 
that further rental revenue upside will be driven mainly by positive rental 
reversion.

Residential Profitability Recovered: Fitch expects Lai Fung's gross profit 
margin to remain at above 30% in the next two to three years, underpinned by low 
land cost. Its gross profit margin for the property development business 
recovered to 45% in FY18 from 19% in FY17, as profit recognition in FY17 was 
mainly from the Palm Spring project, in Zhongshan, which had a lower profit 
margin than other projects. Lai Fung's contracted sales from development 
properties will be driven by Palm Spring and the sale of cultural studios in 
Novotown in FY19, and potentially the Wuli Bridge project in FY20. 

 

DERIVATION SUMMARY

Lai Fung's 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. Lai Fung's leverage, as defined by net 
debt/adjusted inventory, at 21%, also compares favourably with 'BB' rated peers' 
leverage of between 30% and 40%.

Among Asia-Pacific property peers, Lai Fung has a smaller business scale and 
slightly weaker financial profile than PT Pakuwon Jati Tbk (BB/Stable). Both 
companies have stable IP portfolios, which provide a buffer to fund their 
development-property businesses. Lai Fung's small IP EBITDA of around USD60 
million is lower than Pakuwon's USD130 million. Lai Fung also has lower interest 
coverage of about 1.0x-1.5x than Pakuwon's 5.0x. However, Lai Fung has a higher 
quality IP portfolio focusing on tier 1 cities in China, such as Shanghai and 
Guangzhou, compared with Jakarta and Surabaya for Pakuwon.

KEY ASSUMPTIONS

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

- Mid-to-low single-digit percentage rental growth

- Rental GFA growth of about 77% in FY19 and 0% in FY20-21

- Capex of HKD2 billion in FY19 and HKD1 billion a year in FY20 and FY21 (FY18: 
HKD1 billion)

- Hong Kong dollar (HKD) at 1.1 to the yuan (CNY) over 2018-2020

RATING SENSITIVITIES

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

- IP EBITDA above HKD600 million (1HFY19: HKD222 million) and IP EBITDA/interest 
expense exceeding 1.5x (1HFY19: 0.9x) 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 sustained above 40%  (1HFY19: 32%)

LIQUIDITY

Sufficient Liquidity: Lai Fung has maintained enough cash to cover its 
short-term debt. It had HKD3.7 billion cash (including pledged and restricted 
time deposits), which was sufficient to cover its short-term borrowings of 
HKD0.7bn as of end-January 2019. Lai Fung's 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-'; and

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

Contact: 

Primary Analyst 

Rebecca Tang

Director

+852 2263 9933 

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Ricky Lam

Associate Director

+852 2263 9991 

Committee Chairperson

Kalai Pillay

Managing Director

+65 6796 7221

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

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Media Relations: Yee Man Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

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. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019)

https://www.fitchratings.com/site/re/10089196

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10091986

Solicitation Status 

https://www.fitchratings.com/site/pr/10091986#solicitation

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https://www.fitchratings.com/regulatory

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