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Announcement:

Moody's comments on Hutchison's 1H FY2011 results

05 Aug 2011

Hong Kong, August 05, 2011 -- Moody's Investors Service says that Hutchison Whampoa Ltd's (HWL) first-half results (January to June) for FY2011 were generally in line with Moody's expectations, and have no immediate impact on the company's A3 issuer and senior unsecured bond ratings.

The ratings outlook remains negative.

"HWL reported a significant increase in headline revenue and earnings in the first half because of growth in most business segments. Its reported EBITDA (including share of associates and jointly-controlled entities' EBITDA, before exceptional items) grew about 38% year-on-year," says Elizabeth Allen, a Moody's Vice President and Senior Credit Officer. "Such growth was attributable to improved performance in most business segments, except for Hutchison Asia Telecommunications, as well as the finance and investment segments."

The 3G telecoms business reported EBIT of HKD767milllion (including a one-off net gain of HKD457million), showing an upward trajectory after it turned EBIT positive (after certain one-off items) for the first time in 2H2010. The overall cash requirement of the 3G business has fallen, reflecting trends in top-line growth and controlled capex spending, and despite higher customer acquisition costs (CACs). On the other hand, the operating environment for HWL's key 3G markets remains challenging, especially in Australia. Nonetheless, management expects EBIT to remain positive in 2H2011, barring any significant adverse market or regulatory developments.

However, the improved profitability for most businesses did not translate into improved cash flow/debt metrics. These ratios are still weak for HWL's rating, and such weakness is captured in the negative rating outlook. Adjusted funds from operations (FFO) /net debt decreased to about 14.4% in June 2011 from around 17% at end-2010 for the reasons discussed below. The current level of FFO/net debt is slightly below Moody's expectation.

HWL's consolidated FFO showed a year-on-year decrease of 13% partly reflecting higher CACs of its telecoms businesses. In addition, the significant improvement in profitability at Husky Energy Inc (Baa2/negative outlook, a 33.4%-owned associate of HWL) and Cheung Kong Infrastructure (CKI, unrated, a 81.5%-owned subsidiary of HWL) did not help strengthen HWL's FFO. This is because of HWL's commitment to take script dividends from the former and the latter's key investments are unconsolidated. The Hutchison Port Holdings Trust (HPHT, unrated) spin-off also reduced the FFO contribution from the ports business in this period.

Besides, there was only a moderate reduction in net debt, despite the receipt of HKD45bn in cash proceeds from the spin-off of HPHT. Based on Moody's calculation, reported net debt fell by HKD16bn to HKD138bn, reflecting (1) the increase in capex and investment spending, including investments in Chinese property projects and the purchase of telecom licences in Hong Kong and Sweden; (2) higher dividend payments; and (3) the adverse impact of the conversion of foreign currency loans into Hong Kong dollars. In its calculation, Moody's excludes listed equity holdings from cash, re-classifies 50% and 75% of HWL and CKI's perpetual capital securities as debt from equity and includes unrealised gain on interest rate swaps and other adjustments to debt.

On the other hand, Moody's acknowledges that HWL's book leverage has improved, reflecting the significant gain from the spin-off. Adjusted net leverage improved to 39% in June 2011 from 43% end-2010. Based on Moody's calculation, reported net leverage improved to about 26% from 31%, a 5% reduction that is in line with management's guidance.

The recent announcement by a consortium formed by CKI to acquire Northumbrian Water Group Plc (unrated) for an equity consideration of GBP2.4bn will weaken the above credit metrics marginally. Refer to Moody's press release of August 3 for details.

Moody's considers that HWL's strong business positions, diversified operations, and excellent liquidity position continue to support the rating. Its liquidity profile remains strong with liquid reserves (excluding equity holdings) of HKD97.4bn against debt of about HKD33bn due by end-2012.

HWL's A3 rating has a negative outlook, and reflects historically modest credit metrics for the rating, especially its weak cash flow-related metrics. We expect a gradual improvement of these metrics by end-2011.

A rating upgrade is unlikely, given the negative outlook. The outlook would return to stable if HWL's financial profile improved, such that FFO/net debt trends close to 25%, and unadjusted and adjusted net debt to capitalization was around 25% and 40% on a sustainable basis.

On the other hand, the rating would be downgraded if 1) HWL's FFO/net debt did not improve and remained significantly below 25%, while FFO/interest coverage dropped below 3.5-4x, and unadjusted and adjusted net debt to capitalization remained significantly above 25% and 40%; 2) stable income from its businesses, excluding 3G, was disrupted, with recurring annual EBITDA falling below HKD25-30 billion; 3) the cash drain due to 3G did not improve materially; and/or 4) large debt-funded acquisitions occurred in its businesses.

A material weakening of HWL's liquidity profile could also result in downward rating pressure.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

HWL's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside HWL's core industry and believes HWL's ratings are comparable to those of other issuers with similar credit risk.

Hutchison Whampoa Ltd is one of the largest Hong Kong-based conglomerates with a strong presence in Asia and Europe. Its five core businesses are: (1) ports and related services; (2) property and hotels; (3) retail; (4) telecommunications; and (5) energy, infrastructure, finance & investments, and others.

Hong Kong
Elizabeth Allen
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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 comments on Hutchison's 1H FY2011 results
No Related Data.
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