Hong Kong, November 02, 2020 -- Moody's Investors Service has affirmed the A3 issuer ratings of China
Tourism Group Corporation Limited (CTG) and its key subsidiary,
China Travel Service (Holdings) Hong Kong Ltd (CTS).
Moody's has also affirmed the following:
(1) the A3 senior unsecured rating on the USD bonds issued by Sunny Express
Enterprises Corp. and guaranteed by CTG.
(2) the A3 senior unsecured rating on the USD bonds issued by King Power
Capital Limited and guaranteed by CTS.
The outlook on the ratings remains stable.
"The affirmation of CTG's ratings reflects our expectation that
its credit profile will remain appropriate for its ratings,"
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
"Specifically, robust earnings growth from its duty-free
business and strong cost and expense controls will offset the weaker performance
of its tourism operations due to the coronavirus and the volatility of
its real estate development business," adds Lu.
The affirmation of CTS' ratings reflects Moody's view that
CTG's and CTS' credit profiles are closely linked.
RATINGS RATIONALE
CTG's A3 issuer rating combines the company's Baseline Credit
Assessment (BCA) of baa2 and a two-notch uplift to reflect Moody's
assessment of a strong level of support from and a very high level of
dependence on the Government of China (A1 stable) in times of need.
CTG's baa2 BCA reflects (1) its strong and improving credit profile as
a result of its fast-growing and cash-generative duty-free
operations, (2) its strong brand in China as a leading travel services
provider with over 90 years of experience, (3) steadily growing
demand for leisure travel in China, and (4) its strong liquidity.
However, CTG's BCA is constrained by its exposure to the real estate
development market, which entails business risks, including
the need to finance real estate inventory and higher revenue volatility.
Its BCA is also constrained by the expansion of its tourist attraction
business, leading to execution risks, such as project cost
overruns and delays, and the risk that it will take a longer time
for the segment to achieve profitability.
Moody's has changed the primary rating methodology for CTG to Retail
Industry, reflecting the increasing contribution from its duty-free
operations in terms of revenue and adjusted EBITDA. The business
accounted for 59% and 73% of CTG's total revenue and
gross profit respectively in 2019, up from 25% and 33%
respectively in 2017.
Moody's expects CTG's revenue will decline about 10%
in 2020, mainly due to lower demand for its travel-related
services and part of its duty-free business, including duty-free
stores at airports, travel agencies, hotels, and theme
parks, amid the coronavirus pandemic. The decline will be
partially offset by: (1) strong demand for its duty-free
business in Hainan Province and online sales; and (2) higher sales
from its real estate development business as the company recognizes more
revenue from its strong inventories built in previous years.
However, the company's operating performance should rebound
in 2021 along with the improving economic environment, leading to
strong demand for its travel-related services and duty-free
business. In particular, Moody's expects CTG's
duty-free business to grow through continued strong demand from
its stores in Hainan, robust online sales, a gradual improvement
in intercountry travel, and expanding stores in China.
Moody's also expects adjusted debt/EBITDA will decrease toward 2.0x-2.5x
over the next two years from 3.2x in 2019, driven mainly
by strong earnings growth. This level of leverage well positions
its BCA at baa2.
The strong support assumption is underpinned by the government's full
ownership of CTG and its strategic importance to the development of China's
travel services industry. The assessment also factors in the Chinese
government's strong ability to provide support, as reflected
by the A1 sovereign rating.
CTS' A3 issuer rating incorporates its standalone credit strength and
a two-notch parental uplift to reflect Moody's expectation
that the company will receive strong parental support from CTG or indirectly
from the Government of China, in times of need.
Moody's views that CTG's and CTS' credit profiles are
closely linked as CTS' businesses, such as travel-related
services and real estate development, are integral parts of CTG's
operations, benefitting from the group's strong financial
and operational supports.
This close link also reflects: (1) CTS' role as the core and wholly
owned subsidiary of CTG; (2) CTS' importance to the group as
the primary provider of travel and travel document services, as
well as its role in the Chinese government's strategy to stimulate private
consumption; (3) the two companies' shared management team;
and (4) the track record of support to CTS from CTG, such as intercompany
loans. CTS accounted for about 68% of assets in 2019.
The ratings also factor in the following environmental, social and
governance (ESG) considerations.
From a governance perspective, CTG and CTS have demonstrated prudent
financial management over the years. As a wholly owned central
government-owned enterprise, CTG is closely supervised by
the State-owned Assets Supervision and Administration Commission.
In addition, Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. The companies' ratings factor
in that their operations have been recovering since April 2020,
and that the impact from the breadth and severity of the shock on consumption
has been partially offset by their solid market positions, prudent
financial management, and strong liquidity buffer.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook incorporates Moody's expectation that,
over the next two years, CTG's credit metrics will be maintained
at levels that are appropriate for its current BCA; and its strategic
importance to China's travel services industry will remain intact,
along with the Chinese government's ability to support the company,
as reflected by the stable outlook on the sovereign rating.
The stable outlook on CTS mirrors that of CTG and also incorporates Moody's
expectation that CTS' importance to CTG will remain unchanged.
CTG's rating could be upgraded if its BCA improves without any significant
change in the support assessment. The company's BCA could
improve if it lowers its leverage by increasing its earnings or reducing
its debt, or both. Credit metrics indicative of an improvement
in its BCA include adjusted debt/EBITDA below 1.0x on a sustained
basis.
An upgrade of China's sovereign rating would not have an immediate
impact on CTG's final rating without an improvement in its BCA or
an increase in its strategic importance to the Chinese government.
CTG's rating could be downgraded if its BCA is lowered because of
a significant deterioration in its business or financial profile without
any significant change in the support assessment. Credit metrics
indicative of a lower BCA include adjusted debt/EBITDA above 3.0x
on a sustained basis.
A downgrade of China's sovereign rating would not have an immediate
impact on CTG's final rating without a significant weakening in
its role or BCA because its rating is resilient to a one-notch
downgrade of the sovereign rating.
CTS' rating is closely linked to that of CTG. As such, an
upgrade of CTG's rating will trigger an upgrade of CTS' rating.
Similarly, a downgrade of CTG's rating will trigger a downgrade
of CTS' rating.
The principal methodologies used in rating China Tourism Group Corporation
Limited and Sunny Express Enterprises Corp. were Retail Industry
published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
The principal methodology used in rating China Travel Service (Holdings)
Hong Kong Ltd and King Power Capital Limited was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Headquartered in Hong Kong, China Tourism Group Corporation Limited
(CTG) has three main business segments: travel services, real
estate development and financial services.
CTG is a state-owned enterprise that is 90% owned by the
State Council of China and 10% owned by the National Council for
Social Security Fund of China, and is supervised by the State-Owned
Assets Supervision and Administration Commission. The company has
two main subsidiaries: China Travel Service (Holdings) Hong Kong
Ltd (CTS, A3 stable) and China Tourism Group Duty Free Corporation
Limited, which shares were listed on the Shanghai Stock Exchange
in September 2009.
CTS is wholly owned by CTG and has three main business segments:
travel services, real estate development and financial services.
CTS accounted for about 68% of assets in 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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Regulatory disclosures contained in this press release apply to the credit
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Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
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
Clement Cheuk Yiu Wong
Associate Managing Director
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
