Hong Kong, September 02, 2019 -- Moody's Investors Service has affirmed the Baa3 issuer rating of Chengdu
High-Tech Investment Group Co. Ltd., and the
Baa3 senior unsecured rating on the notes issued by the company.
At the same time, Moody's has changed the outlook on these
ratings to negative from stable.
RATINGS RATIONALE
"The negative outlook reflects Chengdu Hi-Tech's higher
than Moody's expected leverage, due to its large investment
in talent apartments, and Moody's expectation that the company's
debt and leverage will likely rise further over the next 1-2 years,
unless the related government policies on the sales and leasing of these
talent apartments is announced and implemented shortly," says
Kaven Tsang, a Moody's Senior Vice President.
Chengdu Hi-Tech's adjusted debt increased by RMB11.6
billion or 56.9% to RMB32.1 billion in 2018.
The debt growth was driven by the company's large investments in
talent apartment projects in the Chengdu High Tech Zone versus the lower-than
expected cash collection from the sales and leasing of these apartments,
because the government of the High Tech Zone has not announced the details
on how these apartments can be sold or let to eligible talents.
Moody's explains that to support the local economy — especially
the high tech sectors — the Chengdu Government introduced the talent
apartment program (a form of government-subsidized housing) to
attract highly educated people to migrate to and stay in the city.
A large number of such talent apartments remain to be built. Consequently,
Chengdu Hi-Tech's investments in the talent apartment projects
will remain high over the next 1 to 2 years.
Moreover, because the pace of sales or the leasing of these apartments
has been slow — due to policy reasons — Moody's expects
that a large portion of the related capital spending will be debt funded,
and Chengdu Hi-Tech's adjusted debt will further increase
and pressure its Baseline Credit Assessment (BCA) of ba3.
Chengdu Hi-Tech's Baa3 issuer rating primarily combines (1)
its BCA of ba3, and (2) Moody's assessment of the company's
strong level of government support from and high level of dependence on
the Chengdu Government, and ultimately the Government of China (A1
stable), in times of need, resulting in a rating that is three
notches above its BCA.
Moody's support assessment reflects Chengdu Hi-Tech's leading role
in investing, developing and operating the Chengdu High-Tech
Development Zone, its ultimate 100% ownership by the Chengdu
Government in Sichuan Province, and track record of receiving sizable
gross cash payments from the government of around RMB4.2-RMB5.6
billion per annum over the past four years.
The support assessment also considers the reputational and contagion risks
that may arise, if Chengdu High-Tech were to default,
given the company's status as the largest government-owned entity
in the Chengdu High-Tech Development Zone, which is in turn
ranked among the top 10 state-level high-tech development
zones in China, and is therefore of strategic importance to Chengdu
City and Sichuan Province.
As such, Moody's believes the central government would support efforts
by the Chengdu Government and the Sichuan Provincial Government to prevent
Chengdu Hi-Tech from defaulting; thereby avoiding disruption
to the domestic financial market. This support can take various
forms, including government subsidies, capital or asset injections,
as well as loans from policy and state-owned banks.
Chengdu Hi-Tech's BCA is driven by its diversified revenue sources
and product mix to mitigate the volatility of industrial property development,
limited business risk due to its monopoly market position in the high-tech
development zone, and good access to domestic funding.
These credit strengths are partly offset by the company's likely rise
in debt leverage, because of the large capital spending needs for
the development of talent apartments.
The negative outlook reflects Chengdu Hi-Tech's elevated
leverage, and the uncertainty related to the timing and speed of
recovering the capital spending on the talent apartments.
The outlook could return to stable if Chengdu Hi-Tech (1) improves
its operating cash inflow by ramping up the sales and/or leasing of the
talent apartments and industrial zone properties, (2) narrows down
its funding gap and substantially contains its debt growth, and
(3) demonstrates adjusted debt/capitalization below 70% on a sustained
basis.
Moody's would downgrade Chengdu Hi-Tech's ratings if 1) the likelihood
of support from the government decreases, and/or 2) the company's
BCA deteriorates.
Moody's could lower Chengdu Hi-Tech's BCA, if
its debt and leverage continue to grow rapidly, which, among
other things, could be caused by 1) prolonged delays in the sales/leasing
of talent apartments and other industrial zone properties, and 2)
aggressive debt-funded expansion into commercial-prone areas
such as construction, trading and financial services.
Credit metrics indicative of a lower BCA include adjusted debt/capitalization
staying above 70% on a sustained basis.
In terms of environmental, social and governance factors,
Chengdu Hi-Tech's Baa3 issuer rating also takes into consideration
(1) the company's limited risk exposure to environmental impacts,
and changing demographics and consumer preferences, mitigated by
its diversified business profile and the likelihood of strong government
support, and (2) the low predictability of project mandates and
execution, and less forthcoming information transparency,
mitigated by its full ownership, supervision and close monitoring
by the government.
The methodologies used in these ratings were Homebuilding And Property
Development Industry published in January 2018, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Chengdu High-Tech Investment Group Co. Ltd. is 100%
owned by the Chengdu High-Tech Zone Administrative Committee,
under the Chengdu Government. The company is mandated by the Chengdu
Government to develop and operate the Chengdu High-Tech Development
Zone, mainly including infrastructure construction, the development
of talent apartments, as well as the provision of industrial and
office properties for companies moving into the development zone.
The company also engages in some commercial activities, including
construction, commercial property development, merchandising
and trading, financial services and industrial investments.
The local market analyst for these ratings is Sue Su, +86 (106)
319-6505.
REGULATORY DISCLOSURES
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
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issued on a support provider, this announcement provides certain
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rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
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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.
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MD - Corporate Finance
Corporate Finance Group
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