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Rating Action:

Moody's affirms China Communications Construction Co's ratings; revises outlook to negative

 The document has been translated in other languages

17 Apr 2020

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.

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 ratings tab on the issuer/entity page for the respective issuer on www.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 www.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 www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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 www.moodys.com.

Please see www.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 ratings tab on the issuer/entity page on www.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

No Related Data.
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