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Rating Action:

Moody's changes Cheung Kong Property's A3 rating outlook to positive

19 May 2016

Hong Kong, May 19, 2016 -- Moody's Investors Service has changed to positive from stable the rating outlook on Cheung Kong Property Holdings Limited (CKP).

Moody's has also affirmed its A3 issuer rating.

RATINGS RATIONALE

"The positive outlook reflects increasing rating upgrade pressure from CKP's 2015 low debt leverage and strong liquidity position that exceed the levels that support its A3 rating," says Franco Leung, a Moody's Vice President and Senior Credit Officer.

"CKP continues to exercise prudent business and financial management of the ex-Cheung Kong (Holdings) Limited (unrated). Thus, we expect its strong financial profile will likely be sustained in the next 12 to 18 months despite the challenging market conditions in Hong Kong's property development and hospitality sectors,'" adds Leung, who is also the Lead Analyst for CKP.

CKP reported lower-than-expected adjusted debt of HKD61.6 billion. Its debt leverage ratios -- as measured by adjusted debt/capitalization and adjusted net debt/net capitalization -- were low at around 18% and 5%, respectively, at end-2015, substantially below the estimated levels of around 21.5% and 13.1% at end-2014 (estimated proforma ratios assuming restructuring completed in 2014).

Moreover, CKP's liquidity position is extremely strong. Its higher-than-expected cash holdings of HKD45.9 billion at end-2015 covered about 75% of the company's total adjusted debt.

Moody's expects CKP to maintain its current strong financial position because it follows the prudent financial management practices of the ex-Cheung Kong (Holdings) Limited.

Despite a decline in profit margins from its property development sector and weaker demand for retail space and hotel occupancy in Hong Kong (Aa1 negative), Moody's estimates that the company's recurring EBIT/interest will remain strong, at around 3.5x -- 5.0x for the next 12 months.

Its debt leverage -- as measured by adjusted debt to capitalization and adjusted net debt/net capitalization -- will likely remain below 20% and 15% over the next 12-18 months. Such levels are stronger than those expected for its A3 rating.

Such an expectation is also supported by CKP's strong experience in the Hong Kong and China (Aa3 negative) property markets and its cautious land acquisition strategy.

The company has a leading market position in property development in Hong Kong as it has taken over the property business of ex-Cheung Kong (Holdings) Limited (unrated), which had a track record of more than 40 years in Hong Kong property development.

Moody's expects CKP will likely slow down its land acquisitions in light of the uncertainty in both markets. But the company's existing land bank of 0.7 million square meters (sqm) in Hong Kong and 12.5 million sqm under development in China at end-2015 will be adequate to support its revenue growth over the next 2- 3 years.

At the same time, Moody's expects the company to sustain annual contracted sales of around HKD55 billion to HKD60 billion in 2016 and 2017. This will result in further strengthening of the company's cash flow and cash position.

CKP's A3 issuer rating reflects the strong recurring income obtained from its investment properties, its strong market position in Hong Kong's property development sector, the diversified character of its property operations, its good access to the bank and capital markets, and its prudent approach to financial management.

The A3 rating also reflects the diversified state of the company's property operations, which include property development, property investment, and owning-and-operating hotels and serviced apartments.

In addition, the A3 rating has factored in CKP's robust ability to fund its business plan because it has good access to the bank and capital markets.

On the other hand, CKP's A3 rating is constrained by its increasing exposure to property development in China where industry conditions are volatile.

Moody's expects the company's property development business in China will remain material over the next 12-18 months.

CKP's rating will be subject to upgrade pressure if the company achieves strong contracted sales; continues its prudent land acquisitions; maintains an excellent liquidity position; sustains its stable income streams from its investment property portfolio; and attains a strong financial profile such that its adjusted net debt/net total capitalization remains below 15% and recurring EBIT(before valuation gain or loss)/interest exceeds 3.0x - 3.5x on a sustained basis.

On the other hand CKP's rating outlook could return to stable if the company shows weakening in its contracted sales, liquidity position, income from investment property portfolio or rising debt due to rapid expansion or acquisitions.

Credit metrics indicative of an outlook change to stable include EBIT (before valuation gains or losses)/interest -- falling below 3.0x or net debt/net total capitalization exceeding 15%.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in April 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Cheung Kong Property Holdings Limited is a leading property developer in Hong Kong and was listed in Hong Kong in June 2015 after the reorganization of the property businesses of Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited. Cheung Kong (Holdings) Limited was listed in Hong Kong in 1972.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Franco Leung
VP - Senior Credit Officer
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 changes Cheung Kong Property's A3 rating outlook to positive
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