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Announcement:

Moody's: Better cash collections support China State Construction International's credit profile

23 Mar 2016

Hong Kong, March 23, 2016 -- Moody's Investors Service says that China State Construction International Holdings Limited's (CSCI) improved operating cash flow and reduced debt burden -- as shown in its 2015 results -- are positive for its Baa2 issuer rating and the Baa2 rating on the senior guaranteed notes issued by China State Construction Fin (Cayman) I Ltd and guaranteed by CSCI.

The ratings outlook is negative, reflecting the potential for a weaker level of parental support following the outlook change to negative from stable on China's (Aa3 negative) sovereign rating in March 2016.

"CSCI's achievement of positive operating cash flow -- together with its reduced debt level, based on Moody's estimates -- improved its credit metrics in 2015 from a year ago. Such a development is credit positive," said Jiming Zou, a Moody's Vice President and Senior Analyst.

Accordingly, we expect the company to maintain adjusted debt/EBITDA in the range of 3.5x-4.0x in 2016, lower than the average of 4.1x during 2012-2014.

The acceleration in cash collections from its existing build and transfer (BT) projects will mitigate the investment cash outflow and help reduce additional financing needs.

In addition, lower interest rates on the Mainland will facilitate a faster buyback of the BT projects by the relevant local governments.

Nevertheless, a rise in debt/EBITDA from 3.5x in 2015 is still likely due to the company's planned investments of about HKD9 billion in new projects, driven in turn by public-private partnerships.

In 2015, CSCI received buyback payment of HKD6.5 billion, representing an increase of 112.6% from a year ago.

As a result, it achieved a first-time net operating cash flow of HKD300 million, up from a net cash outflow of HKD1.7 billion in 2014.

Moreover, it completed the transfer of its Shanxi Wuyu Expressway build-operate-transfer (BOT) project to the local government and subsequently reduced its adjusted gross debt to HKD19.2 billion at end 2015 from HKD21.8 billion a year ago.

CSCI's solid orders backlog and earnings trend also support its credit profile. In 2015, its revenues grew 10.1% to HKD37.9 billion.

Looking ahead, revenue growth will continue due to the company's strong order backlog, which amounted to HKD136 billion at end-February 2016 and covers sales over the next three years.

CSCI's gross margin of about 13.3% in 2015, despite a decline from 13.8% a year ago, remains strong compared to its domestic peers thanks to its focus on BT projects which generate investment returns. In particular, the gross margin for its affordable housing and infrastructure projects — the two key BT projects accounting for 36.8% of the total revenues — was about 23.7% in 2015.

CSCI's liquidity profile remains strong, because of its large cash holdings and diversified domestic and offshore funding channels. At end-2015, its HKD8 billion in cash holdings accounted for about 40% of adjusted debt and far outpaced its HKD809 million in short-term debt.

The principal methodology used in these ratings was Construction Industry published in November 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

China State Construction International Holdings Limited is a general construction company focusing on buildings and civil engineering work. It is one of the largest construction contractors in Hong Kong, and has continued to expand its business into Mainland China, including for BT and BOT projects, affordable housing projects and infrastructure projects.

The company is 57.6% owned by China Overseas Holdings Limited (unrated), which is in turn controlled by China State Construction Engineering Corporation (unrated), a state-owned enterprise under China's State Council.

The Local Market analyst for this rating is Jiming Zou, +86 (21) 2057-4018.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Chenyi Lu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Better cash collections support China State Construction International's credit profile
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