Idea of the Week: Has Hysan Development's leverage peaked?

Hysan maintains business stability; 2027 poised to be a key growth year

As shown in Chart 1, Hysan recorded total revenue of HKD 3.41 billion in 2024, representing a YoY growth of 6.2%. This was mainly driven by the completion of asset enhancement works at Lee Garden One and Lee Garden Five in recent years, which successfully attracted the return of premium brands and boosted rental income. Core profit also rose by 6.8% YoY to HKD 1.96 billion, reflecting the ongoing stability of Hysan’s overall operations.

Despite challenges in the local retail sector, including shifts in tourist spending habits and rising outbound consumption by Hongkongers. Hysan’s retail segment still achieved a solid 9.5% growth, reaching HKD 1.6 billion. This was largely attributed to the successful completion of refurbishments, which helped attract high-end tenants.

The office leasing segment (covering both Hong Kong and mainland China) also saw a 2.4% increase in revenue, rising to HKD 1.5 billion. Within this, the Lee Gardens area continued to benefit from its strategic location, maintaining a healthy occupancy rate of 90% (compared to 89% in 2023), indicating relative stability.

However, most shopping centres in Hong Kong operate under a “base rent + turnover rent” model. With the retail market remaining weak, turnover rents will remain under pressure. We believe that it will be difficult for Hysan’s retail segment to sustain its current growth momentum in the near term, and there is a risk of negative growth due to possible rental adjustments. Likewise, the office segment faces continued headwinds from oversupply, weak demand, and ongoing rental pressure, suggesting potential downside risks in 2025.

Figure 1: Hysan Development – Revenue and Core Profit

Lee Garden Eight will incorporate performing arts and cultural facilities, and Hysan has already established a long-term partnership with the HKAPA EXCEL. The site is expected to host regular performances and community events, enriching the experience of the area and drawing increased foot traffic. This is anticipated to generate an additional 15–20% in growth for Hysan.

Lee Garden 8 will provide the company with greater flexibility to enter a deleveraging phase over the medium to long term

As of the end of 2024, Hysan's total debt edged up slightly by 0.5% YoY to HKD 35.9 billion (see Table 3). However, the company’s investment property portfolio is valued at HKD 96.7 billion, with only around 20% of these assets pledged as collateral for secured bank borrowings. Hysan’s Net Debt / investment property ratio stands at just 34.9%, and it retains a sizeable HKD 16.7 billion in undrawn committed credit facilities, reflecting a highly manageable level of leverage and solid refinancing capacity.

Investors may be concerned that Hysan's interest coverage ratio sits at just 1.0x, and that this could deteriorate further in the short term. This is partly due to the recent issuance of new perpetual bonds with a coupon rate of 7.2%, significantly higher than the previous 4.1%. Moreover, Hysan’s interest and dividend payments have often exceeded its operating cash flow (see Chart 2), which constrains its ability to deleverage or strengthen its balance sheet in the short term. As such, we believe there is limited room for material improvement in its credit metrics in the near term.

That said, with Lee Garden Eight nearing completion, the group’s revenue is expected to rise significantly, while capital expenditure is likely to decline sharply. There is also potential for further dividend cuts. These developments could create room for the Group to enter a deleveraging phase over the medium to long term, leading to a reduction in overall debt and a notable improvement in interest coverage ratio. Over time, this should enhance the company’s financial resilience.

Table 3: Hysan Development’s Credit Metrics

Figure 2: Hysan’s Operating Cash Flow, Dividends, and Interest Expense

Importantly, Hysan’s greatest credit strength lies in the premium quality of its investment properties. While persistently high interest rates may weigh on valuations, through both rental pressure and rising capitalisation rates, the company’s balance sheet remains relatively insulated.

For instance, even under a 200 basis point increase in cap rates, Hysan’s Net Debt / Investment Properties would rise to 68.8%, still within manageable levels. The value of its property assets would continue to provide creditors with a strong buffer. In other words, even if property valuations fell by around 30%, creditors would still be reasonably covered, indirectly underscoring Hysan’s controlled credit risk.

For investors seeking more stable returns could consider 2027 USD Bond

Our platform currently offers three bonds guaranteed by Hysan Development. The company holds a BBB credit rating from Fitch Ratings, with a Stable Outlook, placing it firmly within the investment-grade category.

Thanks to Hysan’s stable rental income, high-quality investment properties, and ample liquidity, the company’s overall credit risk remains under control, even amid downward pressure on rents and property valuations. For investors seeking more stable returns could consider HYSAN 2.875% 02Jun2027 Corp (USD), which provides a yield to maturity of 5.2%.

For those looking for higher yields, two perpetual bonds backed by Hysan may be worth considering. HYSAN 4.850% Perpetual Corp (USD) is a Fixed-for-Life bond, meaning its coupon rate will remain unchanged throughout the period, hence the issuer has little incentive to redeem this bond. Investors should also be aware that this bond typically comes with higher price volatility.

HYSAN 7.200% Perpetual Corp (USD)was issued recently and includes both a call feature and a coupon reset mechanism. Hysan has the right to redeem the bond at par after 5.5 years (in 2030). If it chooses not to do so, the coupon will reset to the prevailing 5-year U.S. Treasury yield plus 3.277%.

Investors should also take note of the following features in this perpetual bonds:

• Optional Deferral Clause: Hysan may defer coupon payments without triggering a default.
• Dividend Stopper Mechanism: If Hysan defers interest payments on the bond, it cannot declare dividends on its ordinary shares during the deferral period, offering a layer of protection for bondholders.

Table 3: Hysan Bonds

Corporate Risks

US imposing high tariffs on multiple countries, the global trade environment has deteriorated, leading to rising operational costs for many businesses. While Hysan is not directly involved in cross-border trade, the increased pressure on luxury brands, a key segment of its retail tenants, may reduce their appetite for expanding or renewing leases in Hong Kong, thereby weakening demand for retail space.

If these tariffs trigger a global economic slowdown or stagflation, overall business investment and consumer spending could decline further. This would place additional stress on Hysan’s core retail and office tenants, potentially impacting occupancy rates and rental income.

Although there are expectations for interest rate cuts, rates remain relatively high in the short term. This continues to exert pressure on Hysan’s interest expenses. If management maintains its current dividend policy without adjustment, it may delay the company's deleveraging efforts, increasing financial stress and potentially pushing leverage levels higher.

The Lee Garden Eight development also faces several risks, including potential construction delays, cost overruns, and weaker-than-expected demand. If pre-leasing rates fall short or tenant interest declines, the project’s cash flow recovery may be hindered, further straining Hysan’s financial position.

Investors should also be aware of the optional coupon deferral feature attached to Hysan’s perpetual bonds. If the company experiences even mild liquidity pressure, it may choose to suspend interest payments without this constituting a default. This means bondholders would have no legal recourse to claim missed interest or principal payments. In the unfortunate event of a default or liquidation, holders of the HYSAN 7.200% Perpetual Corp (USD) , which is a subordinated bond, would be lower in the repayment hierarchy, and their recovery value could be significantly reduced.

Conclusion

Despite challenges in Hong Kong’s retail market, including shifts in tourist spending and outbound local consumption. Hysan’s overall business remains stable. The Lee Garden Eight project is expected to complete in the second half of 2026, with 2027 positioned as a key growth milestone for the group

With the upcoming completion of Lee Garden Eight, the Group’s revenue is expected to increase significantly, while capital expenditure will decline substantially. This will provide the company with greater flexibility to enter a deleveraging phase over the medium to long term

Backed by stable rental income, premium-quality investment properties, and ample liquidity, Hysan's default risk remains low, even amid pressure on rents and asset valuations. Its perpetual bond currently offers an attractive current yield up to 7.8%

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