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Rating Action:

Moody's affirms Nan Fung's Baa3 ratings; outlook stable

01 Dec 2020

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

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

No Related Data.
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