OREANDA-NEWS. Fitch Ratings has assigned Cheung Kong Property Holdings Limited (CKP) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'A-' with Stable Outlook and a senior unsecured rating of 'A-'.

CKP's ratings are supported by the stable recurring income from its established investment property portfolio and hotel business, its long operating history with well-established track record and its prudent expansion in the property development business. Its ratings are constrained by the volatility in the property development business, which has volatile cash flow generation. Its large exposure to the Chinese property development business, which has high cyclicality and regulatory risks, also constrains the ratings.

KEY RATING DRIVERS
Strong Stable Rental Income: CKP generated HKD6.8bn in rental income through its high-grade investment property portfolio in Hong Kong, which provided healthy investment property EBITDA/gross interest coverage of 3.5x in 2014. Its diversified investment property portfolio includes offices, commercial, and industrial properties. These assets are well-located in the Central district for offices; at Hong Kong's busiest shopping belt, Tsim Sha Tsui, for its commercial properties; and its distribution centre is at the city's container terminal. The Hong Kong investment properties enjoy close to full occupancy and they together contributed to 91% of rental operating profits. The investment properties are valued at HKD123.3bn, which covers net debt of HKD39.4bn by 3.1x. The portfolio's valuation is supported by a rental yield of 5.5%, which is substantially higher than the under 2% interest cost of its three-year HKD55bn loan facility.

Hotels Add to Recurring Income: CKP's hotel portfolio generated HKD3.7bn in EBITDA, which accounted for around 38% of CKP's total recurring EBITDA of HKD9.9bn in 2014. CKP is one of the largest owner-operators of hotels in Hong Kong. It hotel portfolio on attributable basis comprises about 10,000 hotel rooms and 5,000 serviced suites, of which over 80% are located in Hong Kong. CKP's hotel portfolio is well-positioned in the mid-range and is targeted at the mass market. This resulted in more stable occupancy of above 80% in the past three years.

Significant Yet Prudent Property Development: Over 35% and 17% of operating profit came from CKP's Hong Kong and China property sales respectively. CKP has been prudent in its land acquisition and expansion strategy in the past. Fitch expects the company to continue to maintain this business strategy, and expects CKP's property sales to sufficiently cover its property development expenditure. This would enable the company's property development business to remain cash flow neutral.

Well-Established Track Record: CKP has a strong track record of more than 30 years in the Hong Kong and China property markets. CKP's management team has abundant experience and strong execution skills in residential property project sales. It has completed many landmark projects in Hong Kong and China. CKP has displayed resilience through several industry downturns during its long operating history, showing strong cash flow management and maintaining broad funding diversity. Fitch expects CKP to continue leveraging on its scale, its rich operational experience and its low funding cost, while focusing on maintaining neutral free cash flow and achieving stable margins.

Strong Liquidity Profile: CKP had cash balances of HKD32.4bn as at end-2014 and committed undrawn credit facilities of HKD8.6bn against short-term borrowings of HKD5.28bn. Fitch expects CKP will extend its debt maturity profile to match the long-term investment property asset base and continue to have strong access to both bond and loan markets for refinancing at favourable interest cost.

Financial Profile Remains Stable: CKP's Stable Outlook reflects our expectation that its recurring EBITDA interest coverage will remain above 5x (2014: 5.6x) and its net debt-to-investment property, hotel and REIT assets ratio will remain below 30% (2014: 20.2%) in next two to three years. This is driven by CKP's properties development sales proceeds being sufficient to cover its property development expenditure and capex.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CKP include:
- EBITDA margin of around 33%-35% over 2015-2017
- Rental income growth at around 7.5% over 2015-2017
- Hotel income growth at around 5%-5.5% over 2015-2017
- Property development sales proceeds sufficiently cover its expenditure and capex.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to negative rating action include:
- Recurring EBITDA/gross interest expense falls below 3.5x on a sustained basis, or
- Net debt/ investment properties, hotel and REIT assets approaching 40%, or
- Net debt/ recurring EBITDA sustained above 5.5x, or
- Material weakening of its development properties segment, which may be evident from property development sales proceeds falling below its expenditure and capex.

Future developments that may, individually or collectively, lead to positive rating action include:
- Net debt/ recurring EBITDA sustained below 4x