On December 7, Moody's developed Sun Hung Kai Properties Limited ("Sun Hung Kai Properties", 00016HK) subsidiary, Sun Hung Kai Properties (Capital Market) Limited, has a downgrade to a negative outlook from stable.
At the same time, Moody's affirmed Sun Hung Kai Properties (Capital Market) Limited with a backing rating of "A1" for its senior unsecured notes and its multi-currency medium-term note (MTN) program with a backing rating for "P)A1". The Notes, as well as the Medium Term Note Programme, are unconditionally and irrevocably guaranteed by its parent company, Sun Hung Kai Properties.
Stephanie Lau, Vice President and Senior Credit Officer at Moody's, said: "The negative outlook reflects Moody's expectation that Sun Hung Kai Properties' business will be negatively impacted by the downturn in the residential and commercial real estate markets in Hong Kong SAR and Chinese mainland over the next 12-18 months. Coupled with unfavorable interest rate conditions, SHKP's earnings and credit metrics will be below historical averages. ”
Moody's expects the property market to remain challenging in the next 12-18 months due to weak macroeconomic conditions, high interest rates and an increase in new office space** for the Hong Kong SAR.
The rating confirmation reflects Sun Hung Kai Properties' strong business and financial position, which is supported by strong recurring rental income from its portfolio of high-quality investment properties, low financial leverage, its leading position and long-term operating track record in the Hong Kong SAR real estate market, as well as its prudent financial management and excellent liquidity.
Rating justification. In the next 1-2 years, SHKP Properties' adjusted EBITDA is likely to remain at an annual average of approximately HK$33 billion to HK$36 billion, similar to the FY2023 year ending June 30, 2023, but significantly lower than the historical average. The company's weaker profit from real estate sales in FY2024 will be offset by a slight increase in rental income and a slight increase in profit from non-property businesses. Moody's also expects the company's adjusted EBITDA margin to weaken significantly to 47% in fiscal 2024 from 51% in the year-ago quarter, reflecting lower property development margins.
This, combined with higher interest expense, will keep SHKP EBIT at 4 for the next 12-18 months6 times to 53 times, with 50 times is similar, but significantly lower than the 2019-2023 fiscal year 68 times the five-year average. Over the same period, its adjusted debt EBITDA will also remain at 3About 3 times. These ratios put the company at the weak end of the A1 rating category.
The company's large and stable rental income**, coupled with the recurring income from its defensive and diversified business portfolio, which is mainly located in the Hong Kong SAR, will mitigate the potential volatility caused by its property development business.
The rating also reflects Sun Hung Kai Properties' geographical concentration in the Hong Kong SAR and its exposure to the more volatile Chinese mainland property market. However, Moody's expects Sun Hung Kai Properties to continue to leverage its extensive development experience in the Hong Kong SAR and take a cautious approach when investing in Chinese mainland to minimise expansion risks.
In terms of environmental, social and governance (ESG), it has a positive impact on Sun Hung Kai Properties' credit rating. The company's environmental and social risk exposure is driven by its high reliance on natural capital and exposure to natural climate, customer relationships and production risks. However, the impact of these risks is offset by its prudent financial policies and experienced management team, as well as its long and successful experience in the real estate industry.
Factors that can cause rating upgrades or downgrades.
If Sun Hung Kai Properties improves earnings against the backdrop of the ongoing recovery in the Hong Kong SAR property market, or if the company demonstrates its ability to deleverage, Moody's may raise its outlook to stable.
Credit indicators indicating an upward revision to stable outlook include non-real estate development EBIT interest (after pro-rata consolidation of its joint ventures) remaining at 50-5.5 times or more, and the adjusted debt capital remains below 18%-20%.
Conversely, Moody's will downgrade if SHK Properties deviates from its prudent financial policies, weakening its core financial metrics and keeping non-property development EBIT interest at 50-5.Less than 5 times, or adjusted debt capital consistently above 18%-20%.
The company's exposure to Chinese mainland has increased significantly to more than 30%-35% of total assets, which could weigh on its rating.
Headquartered in Hong Kong SAR, Sun Hung Kai Properties is one of the leading real estate development and investment firms in Hong Kong, China. The company's revenue for FY2023 was HK$71 billion.