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.
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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.
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
