Here's why Hopewell is deemed 'stable' despite financial woes

Fitch Affirms Hopewell Holdings at 'BBB-'.

Fitch Ratings has affirmed Hong Kong-based Hopewell Holdings Limited's (Hopewell) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with Stable Outlook.

Hopewell's IDR is underpinned by its stable cash flows from toll road and investment property portfolio. The Stable Outlook reflects Fitch's view that Hopewell's credit profile will remain acceptable for its current rating notwithstanding the expected increase in financial leverage in the next two years to 2014, primarily due to the Hopewell Centre II project. Nonetheless, headroom for further weakening in leverage is limited in the next two to three years.

Hopewell's leverage is likely to increase above the negative rating guideline in FY13. However, Fitch expects these measures to return to levels consistent with its current rating within 24 months, barring further large investments. In particular, the residential portion of the Lee Tung Street project (a 50-50 joint venture project with Sino Land Company Limited) is expected to provide meaningful cash flows to Hopewell, assisting its metrics to return to the level prior to the payment of the land premium for Hopewell Centre II of HKD3.7bn in 2012.

The toll road business, which is managed via its 68%-owned subsidiary, Hopewell Highway Infrastructure Limited (HHI), continued its stable performance in the financial year ended June 2012 with a 5% increase in revenue. An overall increase in traffic volume is driven by continued economic growth in the Guangdong province, and improving connections to local road networks and strategic locations. In particular, the West Route enjoys synergies from completion of Phase II, and average daily traffic grew by 39% in FY12.

A new tariff framework effective from June 2012, as well as the "Holiday Toll Free Policy" effective from October 2012 will adversely affect cash flow generation capacity of the toll road portfolio. Fitch expects the toll road portfolio's EBITDA to decrease by around 15% as a result in FY13. Fitch has not incorporated any form of government compensation due to the negative regulatory changes in the agency's forecasts for Hopewell. Long-term growth prospects are however still positive, supported by the upcoming completion of Phase III of West Delta Route in the first quarter of 2013 (around Lunar New Year), ongoing economic growth in the Pearl River Delta, and increase in car ownership.

The property investment business performed well in FY12. Rental revenue increased 9% to HKD0.7bn in FY12. Currently, Hopewell has a few property investment projects in the pipeline, such as the retail portion of the Lee Tung Street project and Hopewell Centre II, which are scheduled for completion in 2015 and 2018, respectively. These new projects are expected to generate synergies for existing property assets and provide more cash flow upside to Hopewell.

Hopewell's credit profile is further supported by its strong liquidity position. The company (inclusive of HHI) continues to maintain a net cash position, with a cash and gross debt balance of HKD8.0bn and HKD5.5bn as at 30 June 2012, respectively. Planned capital expenditure is well-covered by expected operating cash flow, cash holdings and HKD5.6bn of available undrawn committed facilities. Additionally, a project facility has been put in place for the Lee Tung Street project.

Hopewell's rating is constrained by the limited size of its operations. Both the toll road and property investment portfolios are relatively small compared with higher rated issuers. Its property assets are weaker in quality relative to its Hong Kong peers, as a substantial portion of its properties are not in Hong Kong's prime locations.

What Could Trigger A Rating Action?

Negative: Future developments that may individually or collectively lead to negative rating action include

- Aggressive change in business mix and strategy

- Hopewell's on balance sheet net debt to on balance sheet EBITDA (excluding contributions from property development) exceeding 6.0x

- A fund from operations (FFO) adjusted net leverage (with proportionate project debt at toll road JV and excluding contribution from property development) exceeding 7.0x.

Positive: Future developments that may individually or collectively lead to positive rating action include

- No positive rating action is envisaged in the medium term.