Fitch Affirms Wharf at 'BBB'; Outlook Stable
22/01/2019 10:17
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong/Shanghai-January 22: Fitch Ratings has affirmed Hong Kong-based The Wharf (Holdings) Limited's (Wharf) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'BBB'. The Outlook is Stable. A full list of rating actions can be found at the end of this commentary. The rating affirmation is based on the stable performance of Wharf's China investment-property portfolio, especially its IFS brand, and its prudent financial management, which is evident from its low leverage and robust coverage ratio. Wharf's ratings are constrained by the investment-property portfolio's lower diversity and heavy reliance on rental income from the Chengdu IFS development. KEY RATING DRIVERS Growing China Leasing Portfolio: Wharf's China investment-property revenue increased by 29% to HKD1.7billion in 1H18, mainly due to strong retail sales growth at Chengdu IFS, an integrated development that includes a mall and offices, and contribution from the newly completed Changsha and Chongqing IFS projects. Chengdu IFS generated revenue of HKD1.1 billion in 2017 - HKD882 million from retail and HKD208 million from office and service apartment rentals - accounting for 41% of total China investment-property revenue. Fitch expects the mall to generate HKD1.4 billion-1.5 billion in revenue in 2018-2019 due to its strong momentum in retail sales and rental reversion. Wharf opened the Chongqing IFS in September 2017 and Changsha IFS in May 2018. Fitch expects the two new projects to generate HKD0.8 billion-1.2 billion in 2018-2019, contributing 24%-29% to Wharf's investment-property revenue. We estimate the company's total investment properties increased from 2.1 million sq m at end-2017 to 3.0 million sq m at end-2018 with the completion of the Changsha IFS mall. Faster Land Acquisitions: Wharf has sped up its land acquisitions in the last two years, spending CNY16 billion on purchasing land in 2017 and CNY14 billion in 1H18 and returning to a normal land-replenishment cycle after limited land acquisitions in 2014-2016. Fitch believes Wharf is adding land to maintain a relatively stable sales performance in China but the pace will moderate as it had a sizeable land bank of 3.8 million sq m in China by end-June 2018. Volatile Development Property: Wharf's contracted sales fell 36% to CNY7.2 billion in 1H18, reflecting the volatile profile of its China property-development business that is affected by frequent policy changes and a rapidly evolving competitive landscape. However, Wharf's focus on prime locations in first-tier and top second-tier cities makes it more resilient in a market slowdown. Wharf also has more flexibility in the development timeline as it has sufficient liquidity and enjoys lower finance costs than its competitors, cutting the risk of administrative policies jeopardising its margins. However, a faster expansion of the development business, while not part of our rating case, may pressure Wharf's ratings. Stable Financials after Demerger: Wharf's faster land acquisition pace has led to a net debt position from a net cash position in 1H18. Fitch estimates Wharf's recurring EBITDA to gross interest expense dropped to 2.9x in 2018 from 8.0x in 2017 before the spinoff of the majority of its Hong Kong investment properties into a separately listed company. However, we expect the ratio to stay above 2.5x in 2019-2020 as the Chengdu IFS continues its stable performance while Chongqing and Changsha IFS continue to ramp up. Management has also publicly stated Wharf will continue to adopt a selective land acquisition policy and foresees no major acquisitions in the short term. We therefore expect Wharf's leverage to remain minimal with its net debt to adjusted assets remaining in the low single digits as it completes the capex for its investment properties under development. DERIVATION SUMMARY Wharf's ratings are lower than Hysan Development Company Limited (A-/Stable) because its investment-property portfolio is less mature and the earnings are highly concentrated on a single asset. Both companies have low leverage and healthy financial profiles that support their ratings. Wharf's ratings are comparable with Nan Fung International Holdings Limited (BBB/Stable) although the latter has a more diverse pool of properties and a larger portfolio of financial assets that can be used for expansion. Wharf, on the other hand, has a strong track record in shopping-mall operations and has well-positioned IFS malls in key Chinese cities that will drive its future earnings growth. Wharf's ratings are constrained by its current asset portfolio whereas Nan Fung's ratings are based on a combination of its stable asset portfolio and strong financial flexibility. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - China property-leasing EBITDA margin remains at 60% for 2018-2020 - China property-development EBITDA margin of 15%-30% for 2018-2021 - Capex represents 20% of revenue from 2018 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch does not envisage any positive action until the company expands its investment-property business and diversifies its portfolio, with less reliance on rental income from the Chengdu IFS mall. Developments That May, Individually or Collectively, Lead to Negative Rating Action - Recurring EBITDA/gross interest expense sustained below 2.5x (2017: 8.0x; 2018 estimate post spinoff: 2.9x) - Higher-than-expected expansion in China development-property business that leads to heightened financial risks LIQUIDITY Sufficient Liquidity: At end-June 2018, Wharf had cash balances of HKD30 billion, which were sufficient to cover the short-term borrowings of HKD20 billion. Fitch accounted for 40% of the company's HKD37 billion in equity investments at end-June 2018 as cash equivalents because they were mainly listed equities, in accordance with our Corporate Rating Criteria. The effective borrowing cost was maintained at approximately 3.4%. FULL LIST OF RATING ACTIONS The Wharf (Holdings) Limited - Long-Term IDR affirmed at 'BBB'; Outlook Stable - Senior unsecured rating affirmed at 'BBB' Wharf Finance Limited - Ratings on senior unsecured notes affirmed at 'BBB' 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 Ted Liu Associate Director +86 21 6898 8002 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Summary of Financial Statement Adjustments - A portion of equity investment is reclassified as cash equivalent. Media Relations: 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. 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 Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) https://www.fitchratings.com/site/re/10036366 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10059884 Solicitation Status https://www.fitchratings.com/site/pr/10059884#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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