Hong Kong, April 17, 2020 -- Moody's Investors Service has affirmed the A3 issuer rating of China
Communications Construction Co., Ltd. (CCCC).
Moody's has also affirmed the Baa1 ratings of the subordinated perpetual
notes and the A3 rating of the senior unsecured perpetual notes issued
by CCCI Treasure Limited and guaranteed by CCCC.
At the same time, Moody's has changed the outlook on these ratings
to negative from stable.
RATINGS RATIONALE
"The negative outlook reflects our expectation that CCCC's
leverage -- as measured by debt/EBITDA -- will remain at around
8.0x over the next one to two years, which is high for its
rating level," says Chenyi Lu, a Moody's Vice
President and Senior Credit Officer.
The negative outlook also reflects the weakened credit metrics of CCCC's
parent, China Communications Construction Group Limited (CCCG).
CCCG runs a more volatile property business via Greentown China Holdings
Limited (Ba3, stable), port machinery, and other businesses
in addition to CCCC.
Moody's expects CCCC's debt/EBITDA to increase to around 8.0x
in 2020 and 2021 from 7.6x in 2019, in the absence of any
meaningful deleveraging initiatives, such as asset disposals or
cash flow improvements. The increase will be driven by its rising
debt to fund public-private partnership (PPP) projects, and
by its broadly stable EBITDA in connection with slow revenue growth.
Given coronavirus-related disruptions in China and abroad,
Moody's has lowered CCCC's growth forecast for 2020 to around
1%-2% from its original forecast of 8%-10%.
CCCC has relatively high exposure to overseas markets compared with its
rated local peers. Revenue generated from overseas markets amounted
to around 17%-24% of the company's total revenue
for the past three years. While CCCC could ramp up constructions
domestically in the remainder of the year and recover much of lost revenue,
supported by strong order backlogs and the government's increased spending
on infrastructure, its overall revenue growth and earnings will
remain below previous expectations.
CCCC's A3 rating incorporates its standalone credit strength and a three-notch
uplift based on Moody's expectation of a high level of support from,
and a very high level of dependence on the Chinese Government (A1,
stable) through its state-owned parent, CCCG.
CCCC's standalone credit strength is underpinned by its (1) large scale
and long track record of more than 60 years in the transportation infrastructure
construction industry; (2) new contract wins and ample order backlog,
which provide good revenue visibility; and (3) stable margins for
its core construction business.
At the same time, the company's standalone credit strength is constrained
by (1) its high debt leverage because of its investments in PPP projects;
and (2) execution risks related to the company's investments in
PPP projects and continual expansion into overseas countries.
Moody's assumption of a high level of government support through its parent,
resulting in a three-notch uplift, reflects: (1) CCCC's
important role in the development of China's infrastructure, (2)
CCCG's majority ownership of the company, (3) the fact that CCCC
accounts for around 84% and 71% of CCCG's consolidated
revenues and assets respectively, (4) a track record of government
support for CCCC through CCCG, and (5) the Chinese government's
strong ability to provide support, as reflected by the sovereign's
A1 rating.
The ratings also take into account the following environmental,
social and governance (ESG) factors.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
In terms of governance risks, the rating takes into account the
fact that CCCC is controlled, supervised, and monitored by
CCCG, a 100% government-owned entity under the central
government. As a listed company on the Shanghai and Hong Kong stock
exchanges, CCCC provides good disclosure of its businesses and financial
performance. The company is led by an experienced management team
and has a sound track record of project execution. The company's
tendency to debt-fund its growth is counterbalanced by the government
oversight and directive to deleverage.
The negative outlook reflects Moody's expectation that CCCC's
debt leverage will remain high for its rating level, constrained
by the weakened credit metrics of CCCG.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could return to stable if CCCC (1) achieves decent EBITDA
growth despite coronavirus-related disruptions; (2) maintains
a prudent investment strategy; and (3) improves its debt leverage
through asset disposals and stronger cash flow generation, such
that the debt/EBITDA of both CCCC and CCCG remains below 7.0x on
a sustained basis.
CCCC's ratings would be downgraded if Moody's lowers the company's standalone
credit strength because of a material deterioration in its business profile,
or if its financial leverage remains at an elevated level, in the
absence of any significant changes in the support assessment.
Credit metrics indicative of a downgrade include CCCC and CCCG's
adjusted debt/EBITDA staying above 7.0x for a prolonged period.
Moody's could also downgrade CCCC's ratings, without lowering its
standalone credit strength, if Moody's assesses that government
support, through its parent, has weakened, or if the
government ceases to own an effective controlling stake.
The principal methodology used in these ratings was Construction Industry
published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Beijing, China Communications Construction Co.,
Ltd. is a large engineering and construction group, with
business scopes 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 57.96%-owned by China Communications
Construction Group Limited (CCCG, unrated), a state-owned
enterprise wholly owned by the State-Owned Assets Supervision &
Administration Commission under the State Council of the People's Republic
of China as of end 2019.
The local market analyst for these ratings is Sue Su, +86 (106)
319-6505.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
