Hong Kong, August 27, 2021 -- Moody's Investors Service has changed to positive from stable the
outlook on Chengdu High-Tech Investment Group Co. Ltd.
(Chengdu Hi-tech).
At the same time, Moody's has affirmed Chengdu Hi-tech's
Baa3 issuer rating and the Baa3 senior unsecured rating assigned to the
USD bonds issued by Chengdu Hi-tech.
"The change in outlook to positive reflects the favorable trends in Chengdu
Hi-tech's strategic importance in Chengdu city and debt management,''
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
"We expect that the company's strategic importance will be further
enhanced through its increasing contribution to the development of new
technological zone. We also expect the continuing rollout of the
company's talent apartment projects will lessen its need to incur
incremental debt, improving its debt management prospects,"
adds Lu.
RATINGS RATIONALE
Chengdu Hi-tech's Baa3 issuer rating is based on (1) the
Chengdu government's capacity to support (GCS) score of a3 and (2)
Moody's assessment of how the company's characteristics affect
the Chengdu government's propensity to support, resulting
in a three-notch downward adjustment.
Chengdu Hi-tech will expand their infrastructure investment over
the next five years, notably the area surrounding the newly built
Chengdu Tianfu International Airport, also known as Future Technology
City. Moody's believes the company's policy function
and importance in Chengdu city will be further enhanced through undertaking
these new projects.
To support Chengdu city government's investment in the high-tech
industry, Chengdu Hi-tech is building talent apartments in
Chengdu High-tech Industrial Development Zone (the zone).
Such talent apartment projects could help attract more talents to Chengdu
and receive different regulatory treatment compared with commercial property
projects.
In addition, as several major talent apartment projects will be
ready for presales in the following months, Moody's expects
the sale proceeds can support the upcoming phases of talent apartment
construction, reducing the group's incremental debt growth.
Moody's expects the company's overall debt growth to gradually
slow down over the next six to 12 months, potentially improving
its debt management.
Also, Moody's considers Chengdu Hi-tech continues to
have strong funding to access and manageable contingent liability exposure.
Moody's assessment of the Chengdu GCS score reflects (1) Chengdu's
status as a provincial capital, one of the higher administrative
levels in Moody's assessment of the hierarchy of regional and local
governments (RLGs) in China, and (2) its relatively high contingent
liability risks from state-owned enterprises (SOEs), although
offset by its large and diverse economy.
Chengdu Hi-tech's Baa3 issuer rating also reflects the Chengdu
government's propensity to support the company because of (1) Chengdu
Hi-tech's majority ownership by Chengdu Hi-tech Administrative
Committee under the Chengdu government, (2) its leading role in
investing in and developing and operating the zone, and (3) track
record of receiving recurrent government payments to pre-fund its
infrastructure investments and support other activities, which totaled
RMB24 billion in 2018-2020.
However, the three-notch downward adjustment from Chengdu's
GCS score reflects Chengdu Hi-tech's (1) exposure to commercial
activities, and (2) fast debt growth to support the development
of the Chengdu High-Tech Zone.
The rating also takes into account the following environmental,
social and governance (ESG) factors.
Chengdu Hi-tech bears high social risks because it implements public-policy
initiatives by building public infrastructure in Chengdu city.
Demographic changes, public awareness and social priorities shape
Chengdu Hi-tech's development targets and ultimately affect
Chengdu government's propensity to support the company. Chengdu
Hi-tech's involvement in the talent apartment projects helps
to achieve local government's targets to attract more talent,
prevent population migration and develop high-tech industries in
Chengdu.
Governance considerations are also material to the rating, as Chengdu
Hi-tech is subject to oversight and reporting requirements to its
owner RLG, reflecting its public policy role and status as a government-owned
entity. Chengdu Hi-tech is exposed to low environmental
risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating if China's sovereign rating is
upgraded or Chengdu city government's GCS score improves, which
could be a result of a significant strengthening in Chengdu's economic
or financial profile, or its ability to coordinate timely support.
The rating could be upgraded if Chengdu Hi-tech's characteristics
change in a way that enhances the Chengdu government's propensity
to support. This could be the result of (1) an increase in its
strategic significance to Chengdu and higher-tier government;
(2) an improvement in debt management of the company's capital expenditure
relative to government cash payments; or (3) overall risk profile
of its commercial operations and exposures and investments in commercial
activities becomes more manageable compared with its public-policy
assets.
A downgrade is unlikely given the positive outlook. However,
the outlook could return to stable if the abovementioned positive credit
trends reverse. For example, if the company were to aggressively
expand its commercial business and the risk from its commercial business
increases; or the company's debt and leverage rapidly increase without
a corresponding rise in government payments, leaving it reliant
on higher-cost financing, including through non-standard
channels.
Because Chengdu Hi-tech's rating is based on Chengdu government's
GCS score, the rating could also be downgraded if China's sovereign
rating is downgraded, or if the Chengdu government's capacity to
support weakens, which could be a result of a material worsening
in Chengdu's economic or financial profile, or in the government's
ability to coordinate timely support. Changes in the Chinese government's
policies that prohibit governments from supporting local government financing
vehicles will also affect the rating.
The principal methodology used in these ratings was Local Government Financing
Vehicles in China Methodology published in July 2020 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
As of August 2021, Chengdu High-Tech Investment Group Co.
Ltd. (Chengdu Hi-tech) is 90% owned by the Chengdu
High-Tech Zone Administrative Committee under the Chengdu government.
The Sichuan Provincial Finance Department owns the remaining 10%
stake.
Chengdu Hi-tech primarily develops and operates the zone,
mainly including infrastructure construction, provision of industrial
and office properties for companies and construction of talent apartment
projects for talents moving into the zone. It's also engaged
in industrial investment under government guidance, trading and
construction business, which are mainly to serve local infrastructure
needs. The company reported revenue and total assets of RMB10.3
billion and RMB125 billion, respectively, in 2020.
The local market analyst for these ratings is Sarah Xu, +86
(212) 057-4030.
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Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
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