OREANDA-NEWS. Fitch Ratings has assigned Cheung Kong Property Holdings Limited's (CKP; A-/Positive) USD3bn Euro medium-term note (MTN) programme a rating of 'A-'. The notes under this programme will be issued by CK Property Finance (MTN) Limited and will be unconditionally and irrevocably guaranteed by CKP. The programme is rated at the same level as CKP's senior unsecured rating because the notes issued under the programme will constitute direct and senior unsecured obligations of the company.

KEY RATING DRIVERS

Solid Rental Income: CKP generated HKD5.1bn in rental income mainly through its high-grade Hong Kong investment property portfolio in 2015. The properties were valued at HKD120bn at end-2015, which covers net debt of HKD16.4bn by 7.3x, and enjoyed an operating margin of 88%. Fitch expects positive rental reversions for CKP's office portfolio, as these properties are mostly located in the Central district, where supply will remain tight in 2016.

Hotel Margins Under Pressure: The company's hotel portfolio generated HKD4.0bn in revenue in 2015. The Hong Kong hotel segment, which is positioned in the mid-range and targets the mass-market, enjoyed an occupancy rate of 88%. Operating margins of CKP's hotels fell to 32%, from 42%, as the average room rate declined due to lower tourist arrivals and the ongoing renovation of the Horizon Suite Hotel in Hunghom, which is expected to be completed in 2016. Fitch expects the hotel segment margins to remain under pressure for the rest of the year, but EBITDA is likely to increase in 2016 due to the full-year consolidation of the hotels previously owned by the Hutchison Group.

Significant Mainland Property Development: China property development generated 47% of CKP's operating profit in 2015. The company has been prudent in its land acquisition and expansion strategy in the past and Fitch expects CKP to maintain this business strategy, with property sales covering its property development expenditure, allowing the company's property development business to remain cash-flow positive. Fitch expects CKP to generate positive cash flow of HKD5bn-10bn from property development in 2016.

Strong Development Record: CKP has displayed resilience through several industry downturns during its long operating history, showing strong cash-flow management and maintaining broad funding diversity. Fitch expects the company to continue leveraging on its scale, rich operational experience and low funding cost, while focusing on maintaining positive free cash-flow and achieving stable margins.

Potential Acquisitions: Fitch expects CKP to seek investment opportunities to increase its recurring income in the medium - to long-term. The scale of such acquisitions may be substantial, as reflected by the joint bidding of CKP and Cheung Kong Infrastructure Holdings Limited (A-/Stable) for the London City Airport in early 2016, which CKP did not win. Depending on scale, funding requirements and investment return prospects, Fitch believes such acquisitions may pressure CKP's credit metrics.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

- rental income growth of 40%-50% in 2016, due to restructuring, and 7%-8% in 2017

- hotel income growth of 25%-30% in 2016, due to the restructuring, and 3%-5% in 2017

- EBIT margin of 34%-36% over 2016-2017 (2015: 37%)

- property development sale proceeds to cover expenditure and capex

RATING SENSITIVITIES

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

- net-debt/recurring EBITDA sustained below 3.5x (2015: 2.7x)

- net-debt/investment properties sustained below 25% (2015: 14%)

- recurring EBITDA/gross interest expense sustained above 4.5x (2015: 4.4x)

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

- The Outlook will be revised from Positive to Stable if CKP makes substantial new investments in the next 18 months and as a result, cannot maintain its credit metrics as stipulated in the positive guidelines.

LIQUIDITY

Ample Liquidity: CKP had a cash balance of HKD44.5bn at end-2015 and committed undrawn credit facilities of HKD6.5bn against short-term borrowings of HKD5.8bn. The company's debt duration is concentrated in three years, matching the lease duration of its investment property assets. Fitch expects CKP to maintain its reliable access to the bond and loan markets for refinancing at favourable interest cost.