Fitch Downgrades Lai Fung to 'B+'; Outlook Stable

Lai Fung Holdings

08/04/2020 10:37

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-April 08: 

Fitch Ratings has downgraded Lai Fung Holdings Limited's Long-Term Foreign- and 
Local-Currency Issuer Default Ratings (IDR) to 'B+' from 'BB-'. The Outlook on 
the IDR is Stable. Fitch has also downgraded the Hong Kong property company's 
senior unsecured rating and the rating on its USD350 million senior notes due 
2023 to 'B+' with a Recovery Rating of 'RR4' from 'BB-'.

The downgrade reflects Fitch's expectation that Lai Fung's non-development 
EBITDA interest cover will remain below 1.0x due to the bigger-than-expected 
operating cash outflows from its Hengqin Novotown commercial project. Fitch 
estimates Lai Fung's non-development EBITDA interest cover will rebound to about 
1.0x in the financial year ending July 2021 (FY21), assuming an improvement in 
visitor numbers for the theme parks and higher occupancy rates for the hotel at 
Novotown when facilities reopen after their closure in late January due to the 
coronavirus. 

Key Rating Drivers

Weaker-than-Expected Non-Development EBITDA: Lai Fung's non-development EBITDA, 
including hotels and service apartments, in 1HFY20 fell to HKD125 million from 
HKD222 million in 1HFY19, resulting in a drop of its non-development EBITDA 
interest coverage to 0.5x from 0.9x. The investment-property EBITDA drop was due 
to bigger operating losses than Fitch's expectation from Novotown in its initial 
operating period, as visitors to the theme parks and occupancy of the Hyatt 
Regency hotel did not reach profitable levels. 

Novotown May Contribute in FY21: Fitch expects Novotown to make a positive 
EBITDA contribution in FY21, assuming the theme parks and hotels reopen during 
mid-2020. Fitch expects 70% occupancy for the hotel and 85% occupancy for the 
mall, with 400,000 visitors to the theme parks in FY21. We previously expected 
Novotown to break even in 2HFY20, which may be delayed due to COVID-19. There 
may be further delays in achieving profitability if the facilities at Novotown 
do not reopen during May-July. 

Positive Development Cash Flow: Fitch expects Lai Fung's property-development 
segment to generate positive cash flow as the apartments, known as cultural 
studios, at Novotown and the Shanghai Wuli Bridge project have been completed, 
which will generate sales revenue and cash inflows in FY20 and FY21. We expect 
the operating profit margin for property development to remain high, at above 
50%, in FY20 and FY21, underpinned by low land costs. Lai Fung's operating 
profit margin for the property-development business was 72% in 1HFY20.

Increasing Long-Term Investment-Property Contribution: Fitch expects Lai Fung's 
non-development EBITDA interest coverage to increase significantly in FY23, 
after the completion of the Shanghai Northgate Plaza redevelopment in FY22, 
which will add about 694,000 square feet of office space, a shopping centre and 
car parks to its rental portfolio. 

No Rating Impact from Parent: Fitch currently rates Lai Fung based on its 
standalone credit profile as the linkage between Lai Fung and its parent, Lai 
Sun Development Company Limited (LSD), is assessed as weak. The potential 
privatisation and share offer by LSD may result in a stronger linkage between 
Lai Fung and the parent and we may assess Lai Fung based on the consolidated 
profile of LSD. However, we do not think this will have implications for the 
rating in light of the relative credit profiles of the two entities. 

Derivation Summary

Lai Fung's non-development EBITDA/interest cover of 0.5x-1.0x sets it apart from 
most Chinese homebuilders that rely on more risky development-property sales to 
service their debt. Lai Fung's leverage, defined by net debt/adjusted inventory, 
of 21% also compares favourably with 'B' category peers' leverage of about 50%.

Lai Fung has smaller business scale and a significantly weaker financial profile 
than Asia-Pacific property peers such as PT Pakuwon Jati Tbk (BB/Stable). Both 
companies have stable investment-property portfolios, which provide a buffer to 
fund their development-property businesses. Lai Fung's investment-property 
portfolio has higher quality as it focuses on first-tier cities in China such as 
Shanghai and Guangzhou, compared with Jakarta and Surabaya for Pakuwon Jati. Lai 
Fung, however, has lower interest coverage of 0.5x-1.0x than Pakuwon Jati's 5x.

Key Assumptions

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

- Flattish rental income for mature investment properties in Shanghai and 
Guangzhou in FY20-FY23

- EBITDA for Novotown will be negative in FY20 and turn positive in FY21

- Annual capex of HKD1 billion for FY20-FY22 and HKD2 billion for FY23 

- Hong Kong dollar at 1.1 to Chinese yuan over FY20-FY23

Recovery Rating Assumptions:

- Lai Fung to be liquidated in a bankruptcy as it is an asset-trading company

- 10% administration claims

- Advance rate of 75% applied to adjusted development-property inventory post 
margin-adjusted customer deposits

- Advance rate of 60% applied to property, plant and equipment

- Advance rate of 65% applied to investment properties at its book value as the 
investment properties' assessed value is about 65% of the book value

- Advance rate of 100% applied to restricted cash, which consists of guarantees 
for the company's bank borrowings

- Lai Fung's cash on hand was sufficient to pay trade creditors

The recovery rate is 100% based on the above assumptions. China is in Group D of 
countries in terms of creditor friendliness and its Recovery Rating is subject 
to a cap of 'RR4'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating 
action/upgrade:

- Non-development EBITDA/gross interest coverage sustained above 1.2x (1HFY20: 
0.5x)

Factors that could, individually or collectively, lead to negative rating 
action/downgrade:

- Non-development EBITDA/gross interest coverage sustained below 1.0x beyond 
2020

- Weakening of LSD's consolidated financial profile

Best/Worst Case Rating Scenario

International scale credit ratings of non-financial corporate issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: Lai Fung had total cash of HKD2,463 million, including 
restricted cash of HKD1,214 million, sufficient to cover its short-term debt of 
HKD1,090 million at end-January 2020.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

ESG Considerations

ESG issues are credit neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Lai Fung Holdings Limited; Long Term Issuer Default Rating; Downgrade; B+; 
RO:Sta

; Local Currency Long Term Issuer Default Rating; Downgrade; B+; RO:Sta

----senior unsecured; Long Term Rating; Downgrade; B+

Contacts: 

Primary Rating Analyst

Rebecca Tang, CFA

Director

+852 2263 9933

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Adrian Cheng, 

Senior Director

+852 2263 9968

Committee Chairperson

Yee Man Chin, CFA

Senior Director

+852 2263 9696

 

Media Relations: Alanis 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. 27 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10111917

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10090792

Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 
2020) 

https://www.fitchratings.com/site/re/10111386

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

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

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/968880

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10117325

Solicitation Status 

https://www.fitchratings.com/site/pr/10117325#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10117325#endorsement_status

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https://www.fitchratings.com/regulatory

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