Hong Kong, December 01, 2020 -- Moody's Investors Service has affirmed Nan Fung International Holdings
Limited's (Nan Fung) Baa3 issuer rating.
At the same time, Moody's has also affirmed the following
ratings on the below instruments, which are unconditionally and
irrevocably guaranteed by Nan Fung:
(1) the Baa3 backed senior unsecured rating on the notes issued by Nan
Fung Treasury (III) Limited and Nan Fung Treasury Limited, and
(2) the provisional (P)Baa3 backed senior unsecured rating on Nan Fung
Treasury Limited's medium-term note program.
The outlook remains stable.
"The ratings affirmation and stable outlook reflect our expectation that
Nan Fung's capital structure and recurring rental and investment
income will remain largely stable over the next 1-2 years,
despite the coronavirus-led disruptions and weaker economic conditions
in Hong Kong SAR. The affirmation also considers the company's
ample financial and liquidity buffers," says Stephanie Lau,
a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE
"The Baa3 ratings reflect Nan Fung's long track record in Hong Kong's
property market, product diversity, stable recurring income
stream that is partly supported by a growing rental portfolio, and
low debt leverage," says Lau, who is also Moody's lead
analyst for Nan Fung.
The ratings also consider the company's excellent liquidity and financial
flexibility, underpinned by its sizable cash balance of HKD15.6
billion and financial investment portfolio of around HKD21.1 billion
as of 31 March 2020.
These strengths are balanced by the company's small scale,
its exposure to the economic cycles, and the lumpiness of its property
sales, because of its small land bank when compared with other similarly-rated
property developers in Hong Kong and China.
Coronavirus-related disruptions and weak economic conditions in
Hong Kong will have a manageable impact on Nan Fung's property revenue
and investment property portfolio.
Property revenue will be supported mainly by the completion of several
large scale, mass-end residential projects. These
projects will increase property revenue to HKD7.5 billion-HKD8.0
billion in the fiscal year ending March 2021 (fiscal 2021) and HKD10 billion-HKD11
billion in fiscal 2022, from HKD3.9 billion in fiscal 2020.
The resilience of Nan Fung's rental portfolio reflects the fact
that its China commercial properties account for about half of its rental
portfolio, and it has limited rental exposure to more vulnerable
segments, such as discretionary retail and the Grade-A Central
Business District in Hong Kong. The completion of the new projects
will also support a marginal increase in annual rental income (before
joint venture pro rata consolidations) to HKD1.6 billion-HKD1.7
billion over the next 12-18 months from HKD1.6 billion in
fiscal 2020.
Moody's expects that Nan Fung's debt leverage, as measured by adjusted
debt/total capitalization (before the pro rata consolidation of joint
ventures), will register around 28% over the next 12-18
months, similar to the 28.3% as of 31 March 2020.
This forecast reflects Moody's expectation of a stable debt level,
without any material capital spending or debt-funded acquisitions.
This ratio is in line with the Baa3 rating category.
The ratings also take into account Nan Fung's private company status,
concentrated ownership and the dominance of executive directors on its
board as environmental, social and governance (ESG) factors.
These factors are mitigated by the company's long track record of prudent
financial management through the cycles, as well as by its low dividend
payouts. In addition, some degree of checks and balances
are provided by the presence of only independent directors in Nan Fung's
conflicts, audit and remuneration committees.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if Nan Fung (1) increases its
business scale, (2) generates higher recurring revenue from its
investment property portfolio, and (3) maintains a sizeable liquidity
buffer via cash and its financial investment portfolio on a sustained
basis. Credit metrics that Moody's would consider for an upgrade
include adjusted debt/total capitalization (before the pro rata consolidation
of joint ventures) below 20% and recurring income coverage above
2.5x on a sustained basis.
Moody's could downgrade the ratings if (1) Nan Fung undertakes aggressive
expansion that departs from its existing business strategy and results
in an increase in debt leverage; (2) it records a material decline
in its cash position or financial investment portfolio, or both;
or (3) its revenue and earnings remain depressed because of a structural
decline in development revenue amid a depletion of its land bank,
with insufficient growth in recurring income to offset such weakening.
Credit metrics Moody's would consider for a downgrade include debt leverage,
as measured by adjusted debt/ total capitalization, above 30%-33%
(before the pro rata consolidation of joint ventures) and recurring income
coverage of interest below 1.5x on a sustained basis.
The senior unsecured ratings on the perpetual securities issued by Nan
Fung Treasury (III) Limited could be lowered — relative to Nan Fung's
issuer rating — if debt with deferral features becomes a substantial
portion of its capital structure, or if Moody's believes that Nan
Fung will likely defer many payments in advance of default.
The principal methodology used in these ratings was Homebuilding And Property
Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Nan Fung International Holdings Limited is an established property developer
based in Hong Kong, with property projects in Hong Kong and China.
In addition to its own developments, it also has joint ventures
with major developers in Hong Kong. The company has a sizable financial
investment portfolio, providing the group with a good liquidity
buffer.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
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Stephanie Lau
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
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
