Hong Kong companies ‘resilient’, but protests present new risks, challenges, S&P Global Ratings warns
- The effects on infrastructure companies, such as MTR Corporation and the Airport Authority Hong Kong, are ‘more direct and bigger’ says report
- Companies in ‘unfamiliar territories’ of increasingly ‘complex sensitivities that could lead to unforeseen risk, rating agency says
Hong Kong’s rated companies have strong financial foundations, but the ongoing protests present risks and unprecedented challenges for firms operating in the city, according to S&P Global Ratings.
Of the companies rated by S&P, most firms are “fairly resilient” to current volatility associated with the protests, with moderate to minimal exposure to highly affected sectors, such as hotels, high-end retail and tourist retail, the credit rating agency said in a report on Wednesday.
“Operational costs and risks will likely stay elevated in the face of protests, with companies potentially absorbing the costs of damaged property, dents to brand reputation, or heightened regulation. Companies are finding themselves in unfamiliar territories of increasing complex sensitivities that could lead to unpredictable event risks,” S&P said.
But infrastructure and transport firms such as MTR Corporation face more immediate risks because they are more directly exposed to the increasingly violent demonstrations, the report warned.
The protests and unrest began in June in relation to a controversial extradition bill that would have made it easier to send criminal suspects to mainland China for trial, but have evolved into a broader series of issues, including income inequality, affordable housing and the growing influence of the mainland on Hong Kong.
The latest IHS Markit Hong Kong purchasing managers’ index found that the city’s private sector economy remains in a sharp downturn, as the effects of the US-China trade war and political unrest continued to dampen demand in September. Average PMI stood at 42 in the third quarter, the lowest level since the first quarter of 2009, IHS Markit said. A rating above 50 represents an expansion when compared with the prior period.
The unrest – marked by increasingly violent clashes between more radical demonstrators and the police – has pushed the Hong Kong economy to the verge of a technical recession, with some economists predicting it could contract this year. For the moment, the government is predicting zero to 1 per cent gross domestic product growth for 2019.
“Other survey indicators suggest that the economic malaise is unlikely to subside any time soon, as pessimism spread to more firms,” said Bernard Aw, principal economist at IHS Markit. “Business expectations about the year-ahead outlook sank to their lowest for seven-and-a-half years.”
Within S&P’s ratings portfolio, real estate and infrastructure companies are the mostly likely to feel the effects of the protests, followed by conglomerates and utilities, the ratings agency said.
“Infrastructure companies may be more directly affected in the short term with disruptions to services and lower traffic volume,” S&P said. “However, as the protests roll on, the impact to real estate may be larger, with business and consumer confidence waning. That said, for rated real estate and infrastructure companies, we believe the impact to be manageable in the near term.”
Most property leasing and rental companies have a “well balanced” portfolio across office, retail, hotels and residential development, with no particular reliance on a single large tenant or sector, S&P said.
As an example, S&P said property developer Sun Hung Kai Properties derives about 40 per cent of its profit from property sales, 40 per cent from rentals and the rest from hotels, telecommunications, and other businesses.
The effects on infrastructure companies, such as MTR Corporation and the Airport Authority Hong Kong, are “more direct and bigger” in the near term with declining passenger traffic and their lower ability to charge higher rents in their commercial segments. The MTR has been a frequent target for vandalism by more radical protesters and demonstrations at the airport have disrupted traffic and caused the Airport Express train service to shut down.
“If the protests and vandalism continue, their stand-alone credit profiles may be strained unless they scale back or delay large projects,” S&P said. “However, we continue to see a high likelihood of extraordinary support from the Hong Kong government due to the entities’ critical importance as Hong Kong's largest public transport operator and strategic role as the regional aviation hub.”
Tourism, hospitality and retail businesses have been the hardest hit by the protests, but S&P expects the effects on rated companies in Hong Kong to be manageable.
For example, Cathay Pacific, the city’s flagship carrier, saw an 11.3 per cent drop in passenger numbers in August. However, the effects on its parent, Swire Pacific, are likely to be manageable given its diversified operations and financial standing following recent disposals, S&P said.
“The combination of complex external uncertainties and internal conflicts could challenge even the best run company,” S&P warned. “As protests continue, the impact will be more sharply reflected in rising unemployment and slipping consumer and business confidence. This will ultimately lead to a weakening in local spending. Rated Hong Kong companies may need to find a new gear and transform in the face of such challenges.”
