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Rating Action:

Moody's affirms China Merchants Port's Baa1 issuer rating; outlook negative

 The document has been translated in other languages

03 Aug 2017

Hong Kong, August 03, 2017 -- Moody's Investors Service has affirmed the Baa1 issuer rating of China Merchants Port Holdings Company Limited (CMPH) and the Baa1 backed senior unsecured rating of the USD bonds issued by CMHI Finance (BVI) Co., Ltd. and China Merchants Finance Company Limited.

The ratings outlook is negative.

RATINGS RATIONALE

CMPH's Baa1 issuer rating reflects its standalone credit strength and a two-notch uplift based on Moody's expectation that the company will continue to receive a high level of support from China Merchants Group (CMG, unrated), when in need, given its importance as CMG's sole platform for investing, developing and operating the port business.

"We expect CMPH's standalone credit profile to weaken in 2017-2019 due to its aggressive acquisition appetite, as reflected in its announced investments in Shantou Ports Group in China and Hambantota Port in Sri Lanka in this year," says Osbert Tang, a Moody's Vice President and Senior Analyst.

"Accordingly, we expect CMPH's financial profile to stay under pressure over the next two years, given our view that the company will continue to pursue expansion, including in overseas countries, consistent with its growth strategy" adds Tang, who is also the local market analyst for CMPH.

"Our expectation for continues expansion is likely to raise financial leverage further, and raise uncertainty about the future asset mix of the company," Tang says, adding "The outlook on the rating is negative reflecting these concerns".

On 25 July 2017, CMPH announced that it will acquire an 85% interest in a 99-year concession to develop, manage and operate Hambantota Port for up to USD1.12 billion (HKD8.736 billion), or equivalent to 8.5% of CMPH's total assets at end-2016. Such development raises execution challenges, given that its terminal operations are still in the stage of ramping up.

Earlier on 10 April 2017, CMPH had announced the acquisition of a 60% stake in Shantou Ports Group (STPG) through its subscription of the equity interest to be issued by STPG at RMB5.43 billion.

At the same, the rating considers the recent sale of CMPH's 24.53% interest in China International Marine Containers (Group) Co Ltd (CIMC, unrated) which generated HKD8.5 billion in cash and which mitigated the weakness in financial profile.

Moody's expects CMPH to maintain high financial leverage, including adjusted pro-rata consolidated funds from operations (FFO)/debt to range in the low-to-mid teens over this period.

Its fundamental credit strength remains constrained by its low level of control over its minority-owned joint ventures, which have collectively become an important source of cash flow.

CMPH's operating performance has stabilized in 2017, as reflected by an organic growth of 8.4% in container throughput in 1H 2017, compared with just 2.1% in 2016.

Because of our expectation that CMPH will receive a high level of support from its parent CMG and the Chinese government (A1 stable), the rating of CMPH has not been affected by its weakened standalone credit strength.

Moody's expectation of high support for CMPH is based on its high strategic importance to CMG and China's port industry, given its status as the largest Chinese port operator with a 33% share of China's container throughput in 2016.

Moody's expects CMPH will continue its overseas expansion; and this strategy is consistent with the Chinese government's "Belt and Road" initiative. However, further significant debt-funded capex will pressure its standalone credit profile.

The negative rating outlook reflects the pressure on CMPH's standalone credit strength due to the company's continued aggressive acquisitive appetite.

A ratings upgrade is unlikely, given the negative ratings outlook. However, the outlook could return to stable if CMPH's standalone credit strength improves because of a substantial rise in profitability and decline in leverage at its port and non-port joint ventures and through the use of funding structures for its expansions and acquisitions that do not raise material financial risks.

Financial indicator that we would consider to change the ratings outlook to stable include adjusted pro-rata consolidated FFO/debt exceeding 15% on a sustained basis.

Downward rating pressure could emerge if: (1) there is a substantial deterioration in CMPH's profitability or its adjusted debt position; (2) CMPH engages in further material debt-funded acquisitions; (3) there is a material deterioration in the credit profile of its parent company, CMG, which impacts CMPH; and/or 4) we believe that parental support for CMPH will likely weaken. A reduction of ownership by CMG would also be negative for the rating.

Financial indicators for a possible downgrade could include adjusted pro-rata consolidated FFO/debt falling below 10%, and/or adjusted pro-rata consolidated FFO/interest coverage declining below 2.0x on a sustained basis.

The principal methodology used in these ratings was Privately Managed Port Companies published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China Merchants Port Holdings Company Limited (CMPH), listed on the Hong Kong Stock Exchange, has port investments in China (A1 stable), Sri Lanka (B1 negative), Togo (unrated), Djibouti (unrated), Nigeria (B1 stable) and Turkey (Ba1 negative), and a 49% stake in Terminal Link SAS (unrated).

CMPH is the largest public port operator in China in terms of container throughput, with a market share of roughly 33% in 2016. CMPH had a 25.15% stake in Shanghai International Port (Group) Co., Ltd (SIPG, A1 stable) at end-June 2017.

As of 30 June 2017, CMPH was 62% controlled by China Merchants Group (unrated), a conglomerate wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council of China.

The Local Market analyst for this rating is Osbert Tang, +86 (21) 2057-4019.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Ada Li
Vice President - Senior Analyst
Project & Infrastructure Finance
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

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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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