X Factors loom for Hong Kong firms as protests play out: S&P

HONG KONG - Despite four months of protests, Hong Kong's well run and highly-profitable rated companies so far remain resilient - but as political and economic uncertainties pile up, there are multiple scenarios that could impact, says S&P Global Ratings in a report released today.

"Despite their solid footings, Hong Kong rated companies face complex challenges, and prolonged protest could over time lead to thinning rating buffers," says S&P Global Ratings analyst Cindy Huang.

Predictably perhaps, she says, given the steep falloff in visitors from mainland China to Hong Kong, the protests are most likely to affect companies with large exposure to tourism and to discretionary retail.

This includes Swire Pacific Ltd., which has a stake in Cathay Pacific and owns retail spaces in protest flash points like Pacific Place.

"We see Hysan Development Co. Ltd. as moderately exposed to the turbulence given its hefty presence in Causeway Bay shopping malls formerly popular with mainland Chinese shoppers, now a protest hot spot," she says.

"We also view infrastructure groups directly targetted by protests -- such as MTR Corp. Ltd. and Airport Authority Hong Kong -- as vulnerable to declining passenger flow, damage to properties, and lower rental reversions in their commercial segments.

"But what is perhaps more surprising is how resilient Hong Kong companies have been so far in the face of protests.

"For example, the property sector is stabilised by staggered lease maturities (which are usually for three years), no significant reliance on tourist spending, and operations that are balanced between retail rental, office rental, and property development.

"Utilities groups typically have their profits locked in by regulatory fiat.

"Hong Kong companies face upheaval every decade or so, and rated companies have in the past sailed through such challenges (think SARS, the Asian financial crisis. and the global financial crisis).

"This is attributable to the companies' high historic profitability, robust cash holdings and conservative leverage, and their often oligopolistic market positions.

"What perhaps makes this crisis different are the X factors, ranging from Hong Kong's domestic social and political issues, Hong Kong's special status within China, to the Sino-U.S. trade disputes and a slowing global economy.

"As an open economy, Hong Kong is at the forefront of external uncertainties."   www.standardandpoors.com (ATI).