OREANDA-NEWS. Fitch Ratings has affirmed Lai Fung Holdings Limited's (Lai Fung) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed Lai Fung's senior unsecured rating at 'BB-'. The full list of rating actions is at the end of this commentary.

The rating affirmation is based on Lai Fung maintaining a low level of leverage and stable growth in rental income. It also takes into consideration that there will be enough debt headroom for Lai Fung to develop its flagship project in Hengqin, a city in southern China that is close to Macau.

KEY RATING DRIVERS

Prudent Financial Management: Lai Fung has been able to maintain low leverage in the past three years, mainly because property development supplements its main business in property leasing. With only 6.0m sq ft of gross floor area (GFA) of residential space in its land bank as at January 2015, Lai Fung is not active in the land market; instead, it progressively sells homes at projects that were mostly acquired several years ago at lower costs. The sale proceeds are used to support the expansion of its investment property portfolio, which is Lai Fung's main goal. Management aims to expand its rental portfolio to 6.7m sq ft in 2018 from 2.8m sq ft currently.

Hengqin Project a Long-Term Positive: The Hengqin Creative Culture City project will be a sizeable investment for Lai Fung. We expect the development of this project to increase Lai Fung's leverage in the short to medium term, but it will become another important source of recurring income in the long term and contribute significant sellable resources in the medium term. Lai Fung will need to spend around CNY2.4bn for its 80% stake in Phase 1 of the project, which will require a total investment of CNY3bn, including the land cost. Construction of this project is scheduled to start in 2H15.

Concentration of Rental Income: Hong Kong Plaza in Shanghai accounted for over 60% of Lai Fung's gross rental revenue in the financial year ended 31 July 2014 (FY14) and 1HFY15. Although Shanghai Hong Kong Plaza benefited from a surge in rental income after a new food and beverage area was created in FY14, we expect the economic slowdown and increasing competition from online shopping to limit rental upside. Shanghai Hong Kong Plaza will account for about 50% of Lai Fung's rental revenue in FY16-17 as the company completes additional investment properties.

Residential Projects in Prime Cities: Lai Fung holds residential property projects in Shanghai, Guangzhou and Zhongshan, where the housing oversupply is small. The projects in Shanghai and Guangzhou are situated in prime areas, which lead to satisfactory profit margins. Lai Fung's gross profit margins were above 40% in the past three years and may widen in the next 12 months as its high-end projects in Shanghai and Guangzhou take up a bigger share of presales. We believe Lai Fung has no intention to expand its property development business substantially, and is likely to sell its inventory gradually.