August 8, 2017 / 9:21 AM / 10 months ago

Fitch: CKHH's 1H Earnings Solid; in Line with Expectations

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, August 08 (Fitch) Fitch Ratings says CK Hutchison Holdings Limited's (CKHH; A-/Stable) financial and operating results for 1H17 were broadly in line with expectations, despite being affected by foreign-exchange movements against its reporting Hong Kong dollar currency. Reported EBITDA, stripping out currency effects, increased by 7%, with solid contribution from all businesses. The ports sector is a stable EBITDA margin and cash flow business in which CKHH is a leading global operator and developer, notably in container terminals. Ports registered throughput of 3%, which was flat from 1H16. Volume growth in Hong Kong, mainland China, Barcelona and Pakistan more than offset weaker trading volumes in Rotterdam, Jakarta and Dammam. EBITDA margins were stable, supported by cost-efficiency measures. We expect CKHH's continued focus on cost efficiencies and productivity gains to limit margin erosion, despite our expectations of a continued mixed operating outlook for 2017. In retail, CKHH has a leading health and beauty (H&B) business in Asia and Europe. The business continued to perform steadily, with earnings supported by organic growth. Same-store sales growth was moderate, with both Europe and Asia increasing at 3% in 1H17. Same-store sales growth in mainland China continued to decline in 1H17, down by about 6%, due to weaker-than-expected retail demand and heightened competition from e-commerce. However, the decline appears to have narrowed in 2Q17, with same-store sales growth decreasing by about 3%. EBITDA margins for the H&B business in China remain robust at around 20% and we expect this to be maintained in 2017 through cost management and further development of an e-commerce platform. The infrastructure business includes CKHH's 75.67% interest in CK Infrastructure Holdings Limited (A-/Stable), as well as direct investments - predominantly in regulated utilities (electricity, gas and water) in the UK and Australia - which benefit from mature, transparent and supportive regulatory frameworks. We expect CKHH to benefit from stable dividends from these businesses as regulatory periods are fixed for at least four to five years (and even longer in the UK). Reported EBITDA for the infrastructure business declined modestly in 1H17 due to adverse currency effects - on a local-currency basis, reported EBITDA increased by 2%. No dividends from Husky Energy, in which CKHH has a 40.18% stake, have been factored into our forecasts in 2017, given cash flow-management initiatives in a continued low oil and gas price environment. CKHH's mobile telephony operations in Europe (3 Group Europe) is the largest contributor to CKHH's telecommunications business's EBITDA (at over 75%). Reported revenue and EBITDA for 3 Group Europe were up 10% and over 30%, respectively, due to the contribution from the Wind Tre SpA transaction, completed in November 2016. We expect significant synergies from the merger between CKHH's 3 Italia and VEON Ltd's (formerly VimpelCom Ltd; BB+/Stable) Italian operations, Wind Telecomunicazioni SpA (B+/Stable). The 50/50 combined entity, Wind Tre, is one of Italy's largest mobile operators by subscribers, with a market share of over 35%, up from 3 Italia's 12% market share pre-merger, improving its competitiveness and profitability in a highly competitive market. We expect 3 Group Europe to achieve robust results for all its operations (UK, Italy, Sweden, Denmark, Austria and Ireland) in 2017. 1H17 reported revenue and EBITDA at Hutchison Asia Telecommunications (HAT), which comprises mobile operations in Sri Lanka, Indonesia and Vietnam, were affected primarily by higher operating costs associated with the roll-out of the LTE (long-term evolution) network in Indonesia, launched in May, and the lack of competitive LTE price plans prior to the launch. We expect improved revenue and EBITDA contribution from Indonesia in 2H17, but we also expect increased competitive pressure contributing to some EBITDA margin erosion for HAT in 2017. Hutchison Telecommunications Hong Kong (HTHK) performed weakly in 1H17, due mainly to a decrease in handset sales in Hong Kong. A sale of the fixed-line business for around HKD14.5 billion in cash was announced in July; the company stated that completion is expected in October 2017, subject to shareholders' approval. CKHH continues to maintain a stable financial profile. We expect FFO adjusted net leverage to remain at or below 4.0x in 2017-2018, barring significant debt-funded acquisitions or a rise in dividend pay-out ratio. CKHH's ratings are also supported by its robust liquidity profile and ease of access to capital. Reported cash and cash equivalents, excluding other liquid assets, were HKD150 billion at 1H17 (1H16: HKD154 billion), and debt maturities are also well-laddered. The company has strong access to capital markets for its capital needs. 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