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Rating Action:

Moody's affirms Beijing State-owned Capital Operation and Management's A1 rating; outlook remains stable

 The document has been translated in other languages

27 Aug 2021

Hong Kong, August 27, 2021 -- Moody's Investors Service has affirmed the A1 issuer rating of Beijing State-owned Capital Operation and Management Co., Ltd. (BSCOMC).

The outlook for the rating remains stable.

"The rating affirmation reflects BSCOMC's large and diversified investment portfolio, stable financial profile at the holding company level and the very high likelihood of support from the Chinese government,'' says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

BSCOMC's A1 issuer rating primarily combines (1) its baa1 Baseline Credit Assessment (BCA); and (2) Moody's assessment of a very high likelihood of support from and high level of dependence on the Beijing government and ultimately the Government of China (A1 stable), which results in a rating that is three notches above its BCA.

Moody's very high support assessment reflects the following: 1) BSCOMC is the largest state-owned enterprise (SOE) in Beijing, accounting for more than half of total SOE assets in the city; 2) BSCOMC is 100% owned by the Beijing government via Beijing State-owned Assets Supervision and Administration Commission and positioned by the government as its key state-owned capital operation company; 3) a number of BSCOMC's underlying investments have high strategic importance to the Beijing government, such as Beijing Energy Holding Co., Ltd. (A3 Stable), Beijing Capital Highway Development Group Co., Ltd., and Beijing Automotive Group Co., Ltd. (Baa3 stable); 4) BSCOMC is mandated to manage the Government of Beijing Investment Fund; and 5) BSCOMC has a track record of strong support from the government.

The support assessment also considers the reputational and contagion risks that may arise if it were to default, given BSCOMC's close linkage with the Beijing government, which runs the capital city of China.

As such, Moody's believes that the central government is likely to support efforts by the Beijing government to seek ways to prevent BSCOMC from defaulting, and thus, avoid the risk of disruption to the domestic financial markets. This support can take various forms, including government subsidies, capital or asset injections, and loans from policy as well as state-owned banks.

The high dependence level reflects the fact that BSCOMC and the central government are exposed to common political and economic event risks.

BSCOMC's BCA of baa1 is underpinned by its large and diversified investment portfolio, sound investment track record, and prudent financial management, as indicated by its low market value-based leverage (MVL).

However, BSCOMC's BCA is constrained by its high geographic concentration in China and moderate credit contagion risk from some key investees with high financial leverage, such as Shougang Group Co., Ltd. Moody's expects that BSCOMC would provide liquidity support to such key investees if necessary, but the support to these entities will ultimately come from the government.

Moody's estimates that BSCOMC had an adjusted portfolio value of around RMB384 billion as of the end of 2020. Its investments span a wide range of industries, including steel, asset management, regulated electric and gas utilities, toll roads, consumer goods, building materials, automobile manufacturing and financial services. These investments provided BSCOMC with a stable dividend income at an annual average of around RMB7 billion during 2016-2020.

In addition, BSCOMC has demonstrated a sound investment track record, which includes successfully developing new business, achieving the public listings of its major investees and achieving good returns from its market-oriented investment funds.

BSCOMC has a prudent policy on financial management. The company's debt position and leverage at the holding company level are largely stable.

Moody's expects that BSCOMC will have major investment needs of around RMB20 billion-RMB25 billion at the holding company level in 2021, primarily for new equity investments in Beijing SOEs as well as Government of Beijing Investment Fund. Such investments will continue to be partly supported by capital grants from the Beijing government.

Moody's expects BSCOMC's MVL and adjusted (funds from operations [FFO] + interest)/interest coverage to stay at around 12%-14% and around 2x-3x respectively over the next 1-2 years. Such metrics are appropriate for its baa1 BCA.

BSCOMC has a solid liquidity profile at the holding company level, supported by its holding of around RMB21 billion in cash and wealth management products, compared with RMB15 billion of short-term debt as of the end of December 2020. BSCOMC also has strong access to bank credit and the capital markets, because of its status as a high-profile SOE owned by the Beijing government.

BSCOMC's issuer rating also takes into account the following environmental, social and governance (ESG) considerations.

BSCOMC has moderate exposure to environmental risk factors because 21% of the company's investment portfolio focuses on the steel industry. Steel makers in China face increasingly stringent requirements and heightened costs. Nevertheless, BSCOMC's investment portfolio covers a wide range of industries, in addition to steel, that have low exposure to environmental risk. The sizable portfolio and good business diversification provide some stability to the company's portfolio value and dividend income stream.

BSCOMC has moderate exposure to social risks related to demographic and societal trends because 4% and 11% of the company's investment portfolio focuses on automobile manufacturing, and regulated electric and gas utilities, respectively. However, BSCOMC's well-diversified investment portfolio can mitigate the volatility in business and financial performance arising from certain investees. Meanwhile, because most of the investments are concentrated in Beijing, BSCOMC can benefit from the city's well-developed economy and increasing population.

In assessing BSCOMC's governance risk, Moody's takes into consideration its 100% ownership by the Beijing government. BSCOMC demonstrates a prudent investment approach and sound risk management. The company has refrained from expanding aggressively despite its abundant financial resources. Despite its unlisted status, BSCOMC — as a domestic bond issuer — regularly discloses its financial information.

The stable outlook reflects 1) the stable outlook on the China sovereign rating; and 2) Moody's expectation that BSCOMC will prudently manage its investment and that its leverage will remain appropriate for its baa1 BCA.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

BSCOMC's rating could be upgraded if the Beijing government and ultimately the Chinese government's ability to provide support strengthens, which would be illustrated by an upgrade of China's sovereign rating, in the absence of a weakening of BSCOMC's BCA.

BSCOMC's BCA could be upgraded if BSCOMC's investment portfolio materially improves, including an enhanced credit quality of key investees, and stronger business and geographic diversification of its investment portfolio.

Credit metrics that will lead to an upgrade of its BCA include an adjusted MVL below 10% and FFO/interest coverage higher than 4.0x on a sustained basis.

However, a BCA improvement alone will not trigger a rating upgrade, given that BSCOMC is already rated at par with the sovereign.

BSCOMC's rating would be downgraded if the Beijing government and ultimately the Chinese government's ability to provide support weakens, which would be illustrated by a downgrade of China's sovereign rating.

BSCOMC's BCA could be downgraded to baa2 if it embarks on aggressive debt-funded investments, or there is a substantial weakening of the credit quality of its major investees.

Credit metrics indicative of downward pressure on its BCA include an adjusted MVL in excess of 15%-20% and FFO/interest coverage lower than 1.5x for a prolonged period.

However, such a moderate weakening in the company's BCA is unlikely to immediately lead to a downgrade of its rating, given the very high likelihood of government support.

The methodologies used in these ratings were Investment Holding Companies and Conglomerates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125855, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Established in 2008, Beijing State-owned Capital Operation and Management Co., Ltd is a wholly-owned capital operating company under the Beijing municipal government. It is an important platform for managing state-owned assets and capital on behalf of the government, aiming to securitize and maximize the value of these state-owned assets. Moody's estimates that BSCOMC's investment portfolio had a total portfolio value of RMB384 billion as of the end of 2020.

The local market analyst for this rating is Yuting Liu, +86 (106) 319-6530.

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 entity is participating and the rated entity or its agent(s) generally provides 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Gloria Tsuen, CFA
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

No Related Data.
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