Jiuzhong Financial News, on May 6th, Moody's Corporation awarded Sun Hung Kai Properties (Capital Market) Ltd. Under its $7 billion medium-term note plan (rated "A1"), it plans to issue a senior unsecured dollar note "A1" due in 2030.
This note will be unconditionally and irrevocably guaranteed by Sun Hung Kai Properties Development Co., Ltd. (Sun Hung Kai Properties Limited, referred to as "Sun Hung Kai Properties", 00016.HK).
The rating outlook remains "stable".
The proceeds will be used to fund Sun Hung Kai Properties's general corporate activities.
Rating basis
"the'A1 'rating reflects Sun Hung Kai Properties's solid business and financial situation, which is supported by his strong recurrent rental income, high financial flexibility, real estate market leadership and long-term operating record in Hong Kong, China, and prudent financial management," said Stephanie Lau, vice president and senior analyst of Moody's Corporation and chief analyst of Sun Hung Kai Properties.
On the other hand, the A1 rating also reflects the risks associated with the geographical concentration of Sun Hung Kai Properties in Hong Kong, China, as well as the volatility of the mainland real estate market.
However, Moody's Corporation expects the company to continue to capitalize on its extensive development experience in Hong Kong and take a cautious approach to investing in mainland China to minimise expansion risk.
Moody's Corporation expects Sun Hung Kai Properties's total rental income in fiscal year 2020 (or the 12 months ending June 30, 2020) to fall by 10 per cent from HK $20.6 billion in fiscal year 2019 to HK $18 billion, before recovering to about HK $190-20 billion in fiscal year 2021. The decrease in rental income in fiscal year 2020 was mainly due to rent concessions and negative rent increases (rental reversion), affected by slowing economic growth and the outbreak of coronavirus. As a result, net rental income / interest coverage will fall from 5.9x in fiscal year 2019 to about 4.4x in fiscal year 2020 and recover to about 4.7x to 5.0x in fiscal year 2021.
This level of coverage will continue to support the company's financial stability and solvency.
Moody's Corporation expects Sun Hung Kai Properties's adjusted debt-to-capitalisation ratio to be about 16 per cent Mutual 17 per cent in the next 12 months, slightly lower than the 18 per cent as of December 31, 2019. The forecast reflects Moody's Corporation's expectation that HK $18.8 billion from the disposal of 50 per cent of office buildings in some West Kowloon sites will be used to repay debt. While cash flow from leasing and property development is expected to decline, the company's cash flow will be sufficient to cover committed capital expenditure over the next 12 months.
Such leverage and interest coverage are in line with the company's A1 rating range.
The rating also affected the concentration of Sun Hung Kai Properties's ownership in the Guo family and different members of the trust. Nevertheless, this factor is balanced by the company's sound financial policy and maintaining a healthy financial position during the economic cycle.
The "stable" rating outlook reflects Moody's Corporation's expectation that Sun Hung Kai Properties will maintain a stable business condition and control the impact of acquisitions on its financial indicators to a manageable level through prudent financial management.
Factors that may lead to an upgrade or downgrade of the rating
Moody's Corporation is unlikely to upgrade the company in the near future, given its significant exposure to the mainland property market and the short-term volatility of the operating environment of the property market in Hong Kong.
At the same time, if major changes take place in Sun Hung Kai Properties's senior management team, or if the corporate governance structure weakens beyond Moody's Corporation's expectations, negative rating pressure may occur.
If Moody's Corporation's core financial indicator weakens, net rental income / gross profit margin falls to less than 4.0x-5.0x, or adjusted debt / capital exceeds 20 per cent, Moody's Corporation may also downgrade the company.
In addition, Sun Hung Kai Properties's exposure in mainland China has increased significantly, to more than 30% of total assets, 35% of the total assets, which may also put pressure on the rating.
Headquartered in Hong Kong, Sun Hung Kai Properties Development Co., Ltd. is one of the leading real estate development and investment companies in Hong Kong, China. The company reported total revenue of HK $39 billion in the first half of fiscal year 2020 (the six months ended December 31, 2019).
Sun Hung Kai Properties is Sun Hung Kai Properties (Capital Market) Ltd. The parent company and guarantor.