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Rating Action:

Moody's affirms A3 ratings of China Tourism Group and China Travel Service; outlook stable

 The document has been translated in other languages

02 Nov 2020

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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

No Related Data.
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