Fitch Affirms Wharf at 'BBB'; Outlook Stable
27/03/2020 03:34
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-March 26: Fitch Ratings has affirmed Hong Kong-based The Wharf (Holdings) Limited's Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'BBB'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. The rating affirmation is based on the stable performance of Wharf's China investment-property portfolio after the spin-off of most of its Hong Kong investment properties. The ratings are also supported by 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 Weakened but Stable Financial Profile: We expect Wharf's recurring EBITDA to gross interest expense coverage to have dropped to 3.0x in 2019 from 7.9x in 2017. This is due to the spin-off of the majority of its Hong Kong investment properties into a separately listed company and higher gross net debt to fund development property projects. Wharf may temporarily breach our negative rating sensitivity for interest coverage in 2020 due to disruptions from measures to contain the coronavirus pandemic, but we expect recurring EBITDA to gross interest expense to recover and remain above 2.5x in 2021-2022. Growing Mainland Investment-Property Portfolio: Wharf's mainland China investment properties are mainly luxury shopping malls. Revenue from this portfolio increased by 14% in 2019 to HKD3.9 billion, driven by the 13% rise in revenue from Chengdu IFS and 92% increase in revenue from Changsha IFS, which opened in May 2018. Fitch expects revenue from this portfolio to be affected by restrictions to combat the coronavirus in 2020, but it should return to double-digit growth from 2021. Volatile Development Property: Wharf's attributable contracted sales fell 13% to CNY20 billion in 2019, reflecting the volatility in its China property-development business, which is affected by frequent policy changes and a rapidly evolving competitive landscape. However, Wharf has more flexibility than competitors in its development projects as it has sufficient liquidity and enjoys lower finance costs, cutting the risk of administrative policies jeopardizing its margins. Rapid expansion of the development business, while not part of our rating case, may put pressure on Wharf's ratings. Selective Land Purchases in Mainland: Wharf has adopted a very selective approach to land-banking in mainland China due to challenging policies in higher-tier cities. In 2019, Wharf only acquired two pieces of land with a total gross floor area of 0.35 million sq m for an attributable cost of CNY2 billion. We expect this trend to continue into 2020; therefore we expect leverage, measured by net debt to adjusted inventory, to remain in the single digits. Scale and Concentration Limit Ratings: Wharf's ratings are constrained by the investment-property portfolio's high asset concentration. In 2019, revenue from Chengdu IFS and Changsha IFS together contributed over 50%to total investment-property revenue. Wharf's ratings are also constrained by its small operating scale in terms of its investment-property portfolio size and EBITDA compared with higher-rated property peers. Wheelock Privatisation Credit Neutral: Our assessment of the linkages between Wharf and its parent Wheelock and Company Limited is 'Weak' and Wharf's IDR is assessed based on its standalone credit profile. Therefore the proposed privatisation of Wheelock has no impact on Wharf's ratings. Derivation Summary Wharf's business profile is comparable with that of Nan Fung International Holdings Limited (BBB-/Stable). Wharf's investment-property revenue is more concentrated in a few assets, but its investment-property and recurring income EBITDA scale is bigger than that of Nan Fung. The one-notch difference between the ratings on the two companies is mainly driven by Wharf's stronger coverage ratios, as measured by recurring EBITDA to gross interest expense. Wharf is rated lower than Hysan Development Company Limited (A-/Stable) because its investment-property portfolio is less mature and the earnings are highly concentrated in the Chengdu IFS development. Hysan also has lower leverage and higher recurring EBITDA/gross interest coverage. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Contracted sales from China property development of around CNY15 billion in 2020 partially due to suspension of construction and sales activities to contain the spread of the coronavirus. - China land premium for property development business of CNY2 billion in 2019 and less than 40% of contracted sales in 2020-2022 - China development-property EBITDA margin (excluding capitalised interest) above 50% in 2019-2022 - Growth in China investment-property revenue in the double digits a year in 2019-2022, except for 2020, when it will decline by 12% due to coronavirus effects - China investment-property EBITDA margin remain on average around 60% in 2019-2022 - Cash capex at below 5% of revenue in 2019 then at around 12% of revenue in 2020-2022 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch does not envisage any positive rating 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 (2018: 2.8x, 2019E: 3.0x) - Higher-than-expected expansion in China development-property business that leads to heightened financial risks Liquidity and Debt Structure Comfortable Liquidity: At end-December 2019, Wharf had cash balances of HKD27 billion (excluding cash credit), which is sufficient to cover short-term debt of HKD11 billion. Wharf also has investments in equity and fixed-income assets. The investment account increased to HKD36.5 billion by end-2019 from HKD30.5 billion at end-2018. For the calculation of net debt, we give a 40% cash credit to company's marketable securities. The average borrowing cost is 3.6%. Wharf also had HKD30.8 billion of unutilised banking facilities available at end-2019. A small portion of these facilities are uncommitted and based in Hong Kong, which is a common market practice. 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. Wharf Finance Limited ----senior unsecured; Long Term Rating; Affirmed; BBB Wharf (Holdings) Limited (The); Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst Weimin Zhang, Senior Analyst +852 2263 9636 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Rating Analyst Ryan Fung, Associate Director +852 2263 9918 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. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 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/10115534 Solicitation Status https://www.fitchratings.com/site/pr/10115534#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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