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Announcement:

Moody's: Swire's 2013 results are credit positive

19 Mar 2014

Hong Kong, March 19, 2014 -- Moody's Investors Service says that the full year results for Swire Pacific Limited (A3 stable) and Swire Properties Limited (A2 stable) are modestly credit positive, and continue to support their ratings.

The outlook for the ratings remains stable.

"Swire Pacific's results for 2013 provide support for its current ratings. Adjusted underlying profit, excluding increases in its investment property portfolio and non-recurring items, was up 7% on the year to HKD8.4 billion (USD1.1 billion), and reported net cash from operating activities increased by 32% to HKD11.9 billion (USD1.5 billion). Aviation, marine services, and beverages all exhibited improved performances," says Joe Morrison, a Moody's Vice President and Senior Analyst. "Adjusted funds from operations (FFO) to debt and FFO interest coverage were about 15% and 5x, respectively, both on par with last year. We continue to expect Swire Pacific's diversified operations to continue to support a stable credit profile over the intermediate term."

"Swire Properties' stable rental income and solid financial profile continue to be the main drivers for its A2 rating," says Kaven Tsang, a Moody's Vice President and Senior Analyst.

Swire Properties' net rental income grew 7.5% year-on-year in 2013 to HKD8 billion, due to positive rental reversion in Hong Kong and growth in rental income in China. Net rental income covered 4.6x of gross interest expenses in 2013, which well supports the A2 rating.

Swire Properties' property sales dropped 46.7% year-on-year to HKD2.2 billion in 2013 largely because of lower sales recognitions on Hong Kong luxury properties. Nevertheless, contributions from the property development business will remain small and the associated performance volatility will be manageable.

Swire Properties said that its reported debt rose to HKD34.5 billion at end-2013 from HKD30.9 billion at end-2012, largely to fund projects in Hong Kong and the US. As a result, its adjusted debt/EBITDA increased to 4.3x at end-2013 from 3.4x at end-2012, while EBITDA/interest coverage dropped to 5.2x in 2013 from 5.8x in 2012. Nonetheless, both ratios are still in line with Moody's expectations for the company's A2 rating.

The A2 rating also reflects the company's adequate liquidity. Its cash holdings of HKD2.5 billion at end-2013, net rental income of around HKD8 billion and undrawn committed facilities of HKD7.3 billion, are more than sufficient to cover its maturing debt of HKD7.6 billion and estimated capex commitment of approximately HKD8.5 billion for the next 12 months.

While rental growth in the Hong Kong portfolio will slow on softened demand in the office market, growing rental income from its Chinese portfolio should serve to mitigate the impact.

Swire Pacific's Aviation Division reported adjusted underlying profit of HKD1.7 billion in 2013, up 38% year-on-year. The significant increase was due to improved operations at Cathay Pacific on a 3% increase in revenue passengers carried, a 2% increase in passenger yield, and a reduction in costs due to the retirement of older, less efficient airplanes.

Weak air cargo markets, high fuel prices, and a shortage of skilled and semi-skilled labor at Hong Kong Aircraft Engineering Company (HAECO) that adversely affects airframe maintenance and overhaul services continue to restrain profit growth.

Nonetheless, Moody's expects Cathay Pacific Group's cash flow from operations after capital expenditures to improve from increased frequency of long haul passenger flights and lower capex for aircraft and engines over the next couple of years.

The Beverage segment reported that adjusted underlying profit increased 43% year-on-year to HKD812 million in 2013. The business benefitted from lower sugar and resin costs, improving volumes and sales of higher margin products in mainland China, and price increases and an improving sales mix in Hong Kong.

However, double digit labor cost increases in mainland China and capacity constraints and labor shortages in Hong Kong could limit margin expansion going forward. Swire Pacific will not start gaining full benefit of the expansion of territory in Colorado, USA until late in 2014.

The Marine Services Division reported adjusted underlying profit of HKD1.2 billion in 2013, up 27% year-on-year, on higher charter rates and the deployment of new, larger, more specialized vessels. Moody's expects performance in Marine Services to continue to improve as a result of increased demand for larger and more sophisticated vessels. New vessels placed in operation in 2013 will favorably impact 2014 results, and there will be further additions to the fleet this year.

In accordance with the approach outlined in Moody's Special Comment, "Analytical Consideration in Assessing Conglomerates," published in September 2007, Swire's rating takes into account the credit profiles of its major businesses as well as its consolidated credit profile. Moody's further considers other qualitative factors, including management track record, liquidity, diversification benefits, and group structure.

Founded in 1972, Swire Properties is a developer, owner and operator of mixed-use commercial properties in Hong Kong, Mainland China and the US. It also develops premium residential properties in Hong Kong. It was a wholly owned subsidiary of Swire Pacific Limited, before listing on the Hong Kong Stock Exchange (HKSE) in January 2012. Swire Pacific now owns approximately 82% of Swire Properties.

Swire Pacific is engaged in the property investment, property development, aviation, beverages, marine services, and trading and industrial businesses. Listed on the HKSE, it is controlled by a UK-based private company, John Swire & Sons Ltd.

Joe Morrison
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Swire's 2013 results are credit positive
No Related Data.
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