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Announcement:

Moody's: China Merchants Port's announced acquisition of TCP in Brazil is credit negative

06 Sep 2017

Hong Kong, September 06, 2017 -- Moody's Investors Service says that China Merchants Port Holdings Company Limited's (CMPH) announced acquisition of a 90% stake in TCP Participações S.A. (TCP) in Brazil (Ba2 negative) is credit negative, but has no immediate impact on its Baa1 issuer rating and negative outlook.

"CMPH's investment in TCP reflects its aggressive acquisition appetite that weighs on its credit profile and increases its leverage," says Osbert Tang, a Moody's Vice President and Senior Analyst, adding, "This consideration is also reflected in CMPH's negative ratings outlook".

"The TCP acquisition follows CMPH's July announcement of an investment in Hambantota Port in Sri Lanka, and will further increase its exposure to emerging countries that carry higher geopolitical and execution risks than its home market of China," adds Tang, who is also the local market analyst for CMPH.

Following this transaction, Moody's expects CMPH's adjusted pro-rata consolidated funds from operations (FFO)/debt to weaken to a level that is at or slightly below the rating tolerance level of 10%. The transaction also exposes CMPH to the Brazilian operating environment in which the company has limited experience.

On 4 September, CMPH entered into an agreement to acquire a 90% stake in TCP from the existing shareholders and management for a total consideration of BRL2.89 billion (HKD7.23 billion).

TCP holds a concession to operate the container terminal in the Port of Paranaguá until 2048. The Port of Paranaguá is the second largest container port in Brazil with a designed capacity of 1.5 million twenty-foot equivalent units (TEUs).

The consideration amount was equivalent to 6.4% of CMPH's total reported assets at end-June 2017. This amount is also in addition to its April announcement of a RMB5.43 billion (HKD6.12 billion) investment in Shantou Ports Group, and July announcement of a USD1.12 billion (HKD8.74 billion) investment in Hambantota Port.

The transaction is subject to government approvals, including from the Brazilian antitrust and regulatory authorities. CMPH expects the transaction to be completed by the end of 2017, with the total consideration to be paid this year. CMPH plans to fund the transaction through a combination of internal resources and debt.

CMPH intends to use TCP's marine transportation hub to develop its logistics network and export/import and industrial zone to allow for greater synergies.

CMPH's acquisition appetite is a key rating constraint, and Moody's expects any further significant debt-funded capex will pressure the rating to a level that may no longer be consistent with current rating level.

The rating could be downgraded if (1) there is a substantial deterioration in CMPH's profitability or its adjusted debt position; (2) CMPH engages in further material debt-funded acquisitions; (3) there is a material deterioration in the credit profile of CMPH's parent company, China Merchants Group (CMG), which affects CMPH; or (4) we believe that parental support for CMPH is likely to weaken.

Financial indicators for a possible downgrade include adjusted pro rata consolidated FFO/debt falling below 10%, or adjusted pro-rata consolidated FFO/interest coverage declining below 2.0x on a sustained basis.

A reduction in ownership by CMG would also be negative for CMPH's rating.

A ratings upgrade is unlikely, given the negative ratings outlook. However, the outlook could return to stable if CMPH's standalone credit strength improves because of a substantial rise in profitability and decline in leverage at its port and non-port joint ventures and through the use of funding structures for its expansions and acquisitions that do not raise material financial risks.

Financial indicator that we would consider to change the ratings outlook to stable include adjusted pro-rata consolidated FFO/debt exceeding 15% on a sustained basis.

The principal methodology used in this rating was Privately Managed Port Companies published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

TCP Participações S.A. is incorporated in Brazil and primarily operates the container terminal business with concession in the Port of Paranaguá. The terminal has a designed capacity of 1.5 million TEUs, which will increase to 2.4 million by 2020.

China Merchants Port Holdings Company Limited (CMPH), listed on the Hong Kong Stock Exchange, has port investments in China (A1 stable), Sri Lanka (B1 negative), Togo, Djibouti, Nigeria (B1 stable) and Turkey (Ba1 negative), and a 49% stake in Terminal Link SAS.

CMPH is the largest public port operator in China in terms of container throughput, with a market share of roughly 33% in 2016. CMPH had a 25.15% stake in Shanghai International Port (Group) Co., Ltd (SIPG, A1 stable) at end-June 2017.

As of 30 June 2017, CMPH was 62% controlled by China Merchants Group, a conglomerate wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council of China.

The Local Market analyst for this rating is Osbert Tang, +86 (21) 2057-4019.

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.

Ada Li
Vice President - Senior Analyst
Project & Infrastructure Finance
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

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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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