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Rating Action:

Moody's affirms China Communications Construction Co's Baa1 rating; outlook stable

 The document has been translated in other languages

21 Oct 2022

Hong Kong, October 21, 2022 -- Moody's Investors Service has affirmed the Baa1 issuer rating of China Communications Construction Co., Ltd. (CCCC).

Moody's has also affirmed the Baa2 ratings of the subordinated perpetual notes issued by CCCI Treasure Limited and unconditionally and irrevocably guaranteed by CCCC.

The outlook on all entites is stable.

"The rating affirmation and stable outlook reflect CCCC's leading role in infrastructure construction in China and large order backlog that supports revenue and earnings visibility over the next 1- 2 years. In addition, CCCC's stable leverage, albeit on the high side for its rating, and our expectation that the company's strategic importance to the Chinese government will remain intact support the rating and outlook," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

CCCC's Baa1 rating incorporates the company's standalone credit strength and a three-notch uplift based on Moody's expectation of a high level of support from the Chinese Government (A1 stable) through CCCC's 100% state-owned parent, China Communications Construction Group Limited (CCCG), in times of stress.

CCCC's standalone credit strength is underpinned by its large scale and strong business position in China's transportation and infrastructure construction industry; good revenue visibility due to its ample order backlog; and the solid and stable margins in its core construction business.

At the same time, the company's standalone credit strength is constrained by its high leverage because of its debt-funded investments in public private partnership (PPP) projects; and execution and geopolitical risks related to these PPP investments and the company's international expansion.

Moody's support assessment reflects CCCC's critical role in the development of China's infrastructure and CCCC's importance to its parent CCCG as the former accounted for around 81% and 62% of CCCG's consolidated revenue and assets, respectively, in 2021. Moreover, CCCG's majority ownership of and control over the company; the track record of government support for CCCC through CCCG; and the Chinese government's strong ability to provide support, as reflected by its A1 sovereign rating, also underpin the assessment.

CCCC is evolving over the years from a traditional engineering-procurement-construction (EPC) company, into an integrated infrastructure constructor, investor and operator. CCCC has the largest exposure to infrastructure PPP projects such as toll roads and municipal projects among rated Chinese construction companies. Moody's considers such PPP projects, which are normally 70% funded by debt, as having solid risk profiles with acceptable counterparty risks backed by government fiscal budgets and decent demand risk due to continual urbanization.

As CCCC consolidates long-dated PPP project assets and debts, its leverage trends higher than traditional EPC construction companies. Moody's estimates CCCC's leverage would be around 3.7x-4.0x for 2021 and the twelve months ended June 2022, excluding consolidated PPP project-related debts, which are backed by the underlying project assets and are not guaranteed by CCCC. This leverage level is in line with rated global EPC construction companies with similar ratings or standalone credit strengths.

Moody's expects CCCC's leverage – as measured by Moody's adjusted debt/EBITDA – to trend down to 8.9x over the coming 12 to 18 months as higher earnings growth backed by strong orders will outpace debt growth. CCCC's leverage  increased to 9.7x in the last 12 months ended June 2022 from 8.8x as the end of 2021, mainly because of a fast increase in debt to shore up cash for working capital and to fund PPP investments.

Potential acceleration of asset monetization will also support leverage reduction. In April 2022, CCCC set up a publicly listed infrastructure Real Estate Investment Trust, which provided a platform for CCCC to monetize its infrastructure assets and recycle investments.

CCCC's liquidity is weak. The company's reported cash balance and projected adjusted operating cash flow are not sufficient to cover its reported short-term debt and expected capital spending over the next 12 months. However, backed by CCCC's state-owned background, the company has very strong access to domestic bank facilities and capital markets indicated by its sizable unutilized bank facilities and frequent issuances of domestic bonds with low coupon.

In terms of environmental, social and governance risks, CCCC is exposed to inherently high human capital risks because it requires a large labor force that includes specialized talent and subcontractors. CCCC also faces potentially high health and safety risks that require continuing investment to monitor, mitigate and ensure compliance with regulatory requirements.

Governance consideration for CCCC is moderately negative. This reflects the company's financial policy that tolerates high leverage, its relatively complex organization structure that includes a large number of subsidiaries, joint ventures and associates, as well as its board structure that features concentrated ownership.

The stable rating outlook reflects Moody's expectations that, over the next 12-18 months, CCCC's business and financial profiles will remain stable; and the company's importance to CCCG and, ultimately, the central government, and the government's ability to provide support will remain intact.

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

Moody's could upgrade CCCC's ratings if the company's standalone credit profile improves without any material change in the support assumption.

CCCC's standalone profile could improve if the company maintains a prudent investment strategy; improves its debt leverage through stronger cash flow generation and asset disposals, and successfully manages its overseas business while minimizing the related execution risks.

Credit metrics indicating an upgrade include adjusted debt/EBITDA falling below 7.0x on a sustained basis.

Moody's could also upgrade CCCC's rating, without upgrading its standalone credit strength, if the rating agency assesses that the company's importance to its parent and ultimately the Chinese government has increased.

CCCC's ratings would be downgraded if Moody's lowers the company's standalone credit strength because of a material deterioration in the company's business or financial profile, without any material change in the support assessment.

CCCC's standalone credit profile could weaken if it undertakes aggressive investments in PPP projects, resulting in a deterioration in its financial profile; if there is a substantial decline in its new contracts, with its order backlog falling below 1.5x of revenue; or if material execution or geopolitical risks arise in the domestic or international markets.

Credit metrics indicating a downgrade include adjusted debt/EBITDA exceeding 8.5x-9.0x on a sustained basis.

Moody's could also downgrade CCCC's rating, without lowering the company's standalone credit strength, if the rating agency assesses the company's importance to CCCG and the Chinese government has declined.

The principal methodology used in these ratings was Construction published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74957. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Headquartered in Beijing, China Communications Construction Co., Ltd. is a large engineering and construction group, with a business scope covering all-round construction services, including construction and contracting, survey, design and consultancy in various infrastructure projects. The company is one of the largest construction companies in China, and has leading market positions in road, bridge and port construction.

The company was 59.50%-owned by China Communications Construction Group Limited, a state-owned enterprise 90% owned by the State-Owned Assets Supervision & Administration Commission under the State Council of China, and 10%-owned by National Council for Social Security Fund of China as of 29 July 2022.

The local market analyst for these ratings is Sue Su, +86 (10) 6319-6505.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody's Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.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

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

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