OREANDA-NEWS. Fitch Ratings has affirmed Hong Kong-based Sun Hung Kai Properties Limited's (SHKP) Long-Term Issuer Default Rating (IDR) at 'A' and its Short-Term IDR at 'F1'. The Outlook is Stable. Fitch has also affirmed SHKP's senior unsecured rating at 'A' and the senior unsecured notes issued by Sun Hung Kai Properties (Capital Market) Ltd at 'A'.

The affirmation reflects the delivery of strong and stable rental income from SHKP's well-located investment property portfolio, which provides healthy interest coverage. SHKP is focused on asset turnover, and is likely to speed up launches of its Hong Kong residential properties. SHKP's leverage is likely to remain at the current level for the next two to three years. Its financial management remains prudent with good liquidity.

KEY RATING DRIVERS
Strong Investment Property Portfolio: SHKP owns 28.7 million square feet (sq ft) of gross floor area (GFA) of completed investment properties in Hong Kong, with HKD12.3bn in leasing EBITDA in the financial year ended 30 June 2015 (FY15), making it the biggest commercial landlord in Hong Kong in terms of rental income. SHKP also completed 11.6 million sq ft of investment properties in first-tier cities on mainland China, mainly in Shanghai, generating leasing EBITDA of HKD3.3bn in FY15. Fitch expects SHKP to maintain strong investment property EBITDA interest cover of over 4x, supported by a pipeline of investment properties in Hong Kong and mainland China.

Improvement on Leverage: Fitch expects SHKP's net leverage - as measured by the ratio of net debt to investment portfolio value - to remain at around end-June 2015's 16.4% level for the next two to three years. Leverage had improved from a peak of 23.5% a year earlier, when it made payment for the land for the Shanghai Xujiahui Centre Project. The improvement was due to better cash flow from stronger Hong Kong property development sales in FY14-15.

Focus on Asset Turnover: SHKP's contracted sales for residential property in Hong Kong rose 60% to HKD32bn in FY15, driven by strong demand. At the same time, SHKP continued to actively acquire land in Hong Kong. SHKP acquired 4.9 million sq ft in FY15 compared with 3 million sq ft in FY14 and 2 million sq ft in FY13. Fitch expects SHKP to continue its fast asset-turnover model in Hong Kong, given the strong demand for mass-market units and active land auctions by the government. Fitch believes that SHKP has strong ability to achieve quick turnover in the mass-market segment, with property sales margin remaining at a satisfactory level, despite coming under pressure.

Prudent Financial Management: Fitch expects SHKP to maintain healthy interest coverage and leverage ratios given its strong track record of financial management. SHKP's recurring income EBITDA interest cover and EBIT interest cover are likely to stay above 6x and 8x respectively in the next two fiscal years, well above Fitch's negative rating guidelines of 4x and 6x. Net leverage (the ratio of net debt to investment portfolio value) will likely remain around 14%-17% in FY16-17. The company is not likely make another sizeable investment in China in the next few years while it is focused on developing the Xujiahui project.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- Stable EBITDA margin of around 35%-37% in next two to three years
- Recurring EBITDA stays above HKD17bn for next two to three years
- Net debt remains stable at around HKD47bn-52bn for next two to three years

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include-
- Recurring EBITDA/gross interest expense sustained below 4x (FY15: 5.9x)
- EBIT/gross interest expense sustained below 6x (FY15: 8.5x)
- Net debt /investment property assets sustained above 30% (FY15: 16.4%)
- Net debt/recurring EBITDA sustained above 5x (FY15: 3.2x)

Positive: Fitch does not envisage any positive action, as the rating is constrained by exposure to the volatile homebuilding segment.

FULL LIST OF RATING ACTIONS

Sun Hung Kai Properties Limited
- Long-Term IDR affirmed at 'A', Outlook Stable
- Short-Term IDR affirmed at 'F1'
- Senior unsecured rating affirmed at 'A'

Sun Hung Kai Properties (Capital Market) Ltd
- USD7bn medium-term note programme affirmed at 'A'
- USD400m callable variable rate notes due 2024 affirmed at 'A'
- USD500m 3.625% senior unsecured notes due 2023 affirmed at 'A'
- USD500m 4.500% senior unsecured notes due 2022 affirmed at 'A'
- USD300m 4.000% senior unsecured notes due 2020 affirmed at 'A'
- USD300m 5.375% senior unsecured notes due 2017 affirmed at 'A'
- USD500m 3.500% senior unsecured notes due 2016 affirmed at 'A'.