Fitch Rates CK Hutchison Holdings' Proposed Notes at 'A-'

Fitch Ratings has assigned CK Hutchison Holdings Limited's (CKHH, A-/Stable) proposed notes a rating of 'A-'.

The proposed senior unsecured notes will be issued in two tranches by CK Hutchison International (24) Limited and will be unconditionally and irrevocably guaranteed by CKHH and rank pari passu with the company's other senior unsecured borrowings. CK Hutchison International (24) Limited is a wholly owned subsidiary of CKHH.

The company's ratings and Outlook reflect its strong business profile, geographical diversification, stable cash flow generation from its high-quality port, retail, infrastructure and telecommunication businesses, and management's strong record of prudent financial management.

Key Rating Drivers

Gradual Improvement in Operations: Fitch expects operations in CKHH's major segments to improve modestly in 2024, with recovery in its European telecom division, slight improvement in throughput in its ports division, and robust growth in the retail division. In 2023, earnings were affected by deterioration in the European telecom division, lower throughput and decline in storage income in the ports division, but the deterioration was offset by solid revenue and earnings growth in the retail division across all regions with the exception of China, and higher treasury investment return.

CKHGT Earnings Recovery from 2024: Fitch expects the contribution from its European telecom entity, CK Hutchison Group Telecom Holdings Limited (CKHGT, A-/Stable), to gradually recover from 2024 with lower inflation and as revenue initiatives to address cost inflation began in most countries in the middle of 2023. The earnings decline in 2023 was largely due to higher costs under an inflationary environment and the sale of UK tower assets that was completed in late 2022.

Stable Infrastructure Cash Flow: The more stringent regulatory resets over the past few years, especially in the UK and Australia, are now complete for CK Infrastructure Holdings Limited (CKI, A-/Stable), CKHH's main entity in the infrastructure division. As such Fitch expects infrastructure cash flow to remain stable going forward with improved visibility.

Asset-Light Strategy: The company is pursuing an asset-light strategy in the telecom division. It is currently awaiting regulatory approval for the merger of its UK telecom operation with Vodafone Group Plc (BBB/Positive), with CKHGT to hold 49% of the merged entity. Its plans for the sale of a majority stake in the Italian network asset company to a private equity firm, which was announced in 2023, was cancelled in early 2024.

We believe the UK merger will have a limited impact on the company's credit profile as we expect a slight improvement in financial metrics with one-off proceeds and reduced capex offsetting the drop in revenue and earnings contribution.

Robust Financial Profile: CKHH's balance sheet has improved in recent years, supported by tower asset sale proceeds. We expect EBITDAR net leverage to remain largely stable in 2024 (2023: 3.3x) and to improve gradually over the next two-to-three years with gradual earnings recovery. We expect capex to moderate in 2024 after capacity expansion in ports and increased store openings in the retail division in 2023.

Structural Subordination Risk Mitigated: CKHH's port, infrastructure and telecom businesses are capital intensive and raise leverage, which constrains the ratings. There is also some structural subordination of cash flow, especially in utility and infrastructure assets, as there is debt at the asset-owning level and the operating cash flow of these businesses can only be accessed via dividends. However, cash from businesses other than infrastructure or CKHGT and dividend inflow can cover the parent's interest burden, mitigating the structural subordination risk.

Derivation Summary

CKHH's ratings are supported by its business diversification by geography and segment, which provides stable cash flows and underpins its strong business profile. A solid record of conservative and prudent financial management and a coherent strategy also support the business profile.

Few peers have similar business models, as CKHH is a conglomerate with infrastructure, port, retail and telecom segments. It is somewhat comparable with CLP Holdings Limited (CLPH, A/Stable), although CLPH has a stronger business profile, underpinned by stable returns from regulated assets, and a historically more robust financial profile. CLPH's regulated assets are mainly held in its key Hong Kong business, CLP Power Hong Kong Limited (A/Stable).

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Fitch-adjusted revenue to rise by 2%-3% a year in 2024-2025

Fitch-adjusted EBITDA margin of 22% in 2024-2025

Capex of around HKD25 billion per year in 2024-2025

No major acquisitions or disposal. We have not reflected the merger of the UK telecom operations with Vodafone in our rating case as the transaction is still pending regulatory approval.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Provided CKHH's business profile remains unchanged:

EBITDAR net leverage of 3.1x or less on a sustained basis; and

Positive free cash flow (FCF) after acquisitions and dividends for a sustained period.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDAR net leverage exceeding 4.1x for a sustained period;

Substantially negative FCF after acquisitions and disposals;

Significant changes in the business mix and capital structure management that adversely affect its credit risk profile;

Weakening quality or decreased quantity of recurring cash.

Liquidity and Debt Structure

Strong Liquidity, Access to Funding: CKHH's ratings are supported by its robust liquidity profile and easy access to capital. Reported cash and cash equivalents were HKD127 billion at end-December 2023 (end-2022: HKD138 billion), compared with short-term reported debt of HKD58 billion. Debt maturities are also well-laddered. The company has strong access to capital markets and good banking relationships.

Issuer Profile

CKHH is a Hong Kong-listed diversified conglomerate. Its main businesses include telecommunications, mostly mobile operations in Europe, Hong Kong and south-east Asia, as well as infrastructure, retail, and ports.

Summary of Financial Adjustments

Fitch has made adjustments related to lease liabilities as per our Corporate Rating Criteria. Depreciation, amortisation and interest expense are reclassified as operating costs in the income and cash flow statements. Fitch has adjusted the debt by adding 8x annual operating lease expense in the retail segment.

Date of Relevant Committee

26 October 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.