Hong Kong Land still hurt by poor market status in China

Sales amount hit US$262m.

Fitch Ratings has affirmed Hong Kong-based Hongkong Land Holdings Limited's (Hongkong Land) Long-Term Issuer Default Rating (IDR) at 'A', with the Outlook given as Stable, and Fitch also affirming Hongkong Land's senior unsecured rating at 'A'.

According to a release from Fitch Ratings, the affirmation reflects the delivery of stable rental income from Hongkong Land's investment properties portfolio at prime locations in Hong Kong, which provides strong gross rental income coverage ratios.

The release also said that the company's financial position remains prudent with good liquidity.

Here's more from Fitch Ratings:

Prime asset in HK: Hongkong Land's rental portfolio has demonstrated resilience for the past four years in spite of weaker economic conditions in 2008.

As the largest office landlord in Central, Hongkong Land owns 12 office buildings with a total lettable area of 386,000 square metres (sqm).

Its Central leasing portfolio accounted for over 50% of underlying operating profit in 2012-13. The Central district remained as the area of choice for Hong Kong's financial services sector and Fitch expects this to continue in the foreseeable future.

Slower Rental Reversion in 2015: Fitch expects Hongkong Land's expiring office lease portfolio to achieve a slower positive rental reversion of around 5%-6% for 2015.

Its lettable Hong Kong office space expiring for 2015 has an average rental of HKD98 per square feet (sqf) per month, which is still below the current office market rental in Central district (averaging at around HKD103/sqf/month).

For H114, Hongkong Land achieved positive rental reversion; its average rent in its Hong Kong portfolio nudged up to HKD103/sqf/month (H213: HKD101/sqf/month).

Resilient recurring income: For the past 4 years, HongKong Land's rental income EBITDA had been on an upward trend, rising in 2013 from USD649m in 2009, resulting in an average compounded annual growth rate (CAGR) of 4.6%.

This income stream provides the company with strong recurring income interest coverage of 5.7x and 5.6x for 2012 and 2013 respectively. Fitch expects this ratio to stay above 6x for the medium term.

Growing Chinese Property Sales: HongKong Land grew its China property sales rapidly since 2011, mainly in Chongqing, owing to its increased land bank and the improving property market sentiment.

Its contracted sales amount rose 47% YoY to USD632m in 2013. In 1H14, its contracted sales amount remained flat at USD262m due to poor market conditions in China. Fitch expects HongKong Land to book higher profit for its China residential sales in 2014 and 2015.

In addition, property investment will still dominate HongKong Land's balance sheet (Over 89% of gross assets in June 2014) and profits (over 80% of operating profit in 2013-15).

Strong debt profile: HongKong Land enjoys diversified debt funding sources. With 70% of its debt from long term bonds, HongKong Land had an average debt tenor of 7.5 years in 1H14.

It has also one of the lowest costs of debt among its peers, at 2.9% in 1H14. Fitch expects its leverage (net debt/investment property value) to stay below 15% in 2014-15, much lower than the negative rating guideline of 25%