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Announcement:

Moody's: CSCI's 1H 2017 results support its Baa2 rating, and new share issuance is credit positive

24 Aug 2017

Hong Kong, August 24, 2017 -- Moody's Investors Service says that China State Construction Int'l Holdings Ltd's (CSCI) 1H 2017 results are in line with Moody's expectations and support its Baa2 issuer rating and stable outlook.

"CSCI's overall results in 1H 2017, as highlighted by strong revenue growth, solid earnings and an ample order backlog are supportive of its Baa2 rating," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

CSCI also announced that it will raise HKD6.4 billion through a new share issuance to existing shareholders on 22 August, 2017. The proceeds will be used to finance public-private partnership (PPP) projects on the Mainland and reduce debt, which is credit positive.

"The new share issuance reflects the company's increasing orders from and the capital needs of its PPP projects, but at the same time demonstrates its prudent financial management," adds Peter Jia, a Moody's Vice President and Senior Credit Officer and also the Local Market Analyst for CSCI.

CSCI's revenue grew 22% year-on-year in 1H 2017 to HKD23 billion on the faster execution of infrastructure projects on the Mainland, particularly those financed through PPPs.

In 1H 2017, CSCI's revenues from infrastructure (including PPPs) reached HKD9.2 billion, a growth of 46% year-on-year.

CSCI reported a strong order backlog of HKD177 billion at end-June 2017, up from HKD154 billion at end-2016. This level of backlog is about 3.8x its revenue in 2016 and will continue to support its revenues in coming years.

About 77% of its backlog comprise high-margin but asset-heavy infrastructure projects on the Mainland, while the remainder are low-margin but cash-positive engineering-procurement-construction (EPC) projects in Hong Kong and Macau.

CSCI's profitability has been stable and above that of its peers because of its engagement in large infrastructure projects with investment income, its experienced management team with a track record in mature markets, as well as sound project execution and risk controls.

CSCI's gross profit margin reached 14.2% in 1H 2017, up from 12.9% in 2016.

Moody's expects CSCI will continue to grow revenue and earnings in the next 12-18 months, which will be supported by its strong order backlog and the increase in contributions from its high-margin PPP projects.

The investments in PPP projects require large cash payments in advance and PPPs have longer collection periods. But such concerns are partially mitigated by the company's announced equity raising. CSCI has also accelerated cash collections from its existing build-transfer (BT) infrastructure projects.

CSCI's liquidity profile remains strong, supported by its large cash holdings and diversified domestic and offshore funding channels. In June 2017, its HKD11 billion in cash holdings were 2x reported short-term debt and covered 40% of its total reported debt.

However, its financing needs will remain large, driven by the equity investments and cash advances required at the initial stages of PPP projects. In 1H 2017, CSCI's leverage (measured by adjusted debt/EBITDA) increased to 4.1x (LTM basis), from 3.6x at year-end 2016. Adjusted debt increased to HKD29.1 billion from HKD22.6 billion at year-end 2016.

The announced new share issuance of HKD6.4 billion will help reduce CSCI's leverage. With the additional funding, we expect the company to maintain its leverage ratio to about 3.5x in the next 12-18 months despite increasing PPP investments. Such a level of leverage supports its credit profile.

The principal methodology used in this rating was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China State Construction Int'l Holdings Ltd 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 in Mainland China, mainly including infrastructure investment projects.

The company is 63% owned by China Overseas Holdings Limited (COHL), which is in turn controlled by China State Construction Engineering Corporation (CSCEC), a state-owned enterprise under China's State Council.

CSCI is CSCEC's only platform for construction projects in Hong Kong and Macau. It is also a platform for CSCEC's infrastructure investments and operations on the Mainland. CSCI plays a vital role in CSCEC's development of capital-intensive investments for long-term returns.

Since its listing, CSCI has received financial support from its parent, such as unsecured low-cost project loans in 2009 and 2010, and equity subscriptions by COHL during its seasoned offerings in 2007, 2009, 2011 and 2016. In December 2014, COHL injected China Overseas Ports Investment Company Ltd. into CSCI. The newly announced share issuance demonstrates the COHL's continuous support to CSCI.

The Local Market analyst for this rating is Peter Jia, +86 (10) 6319-6571.

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
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

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