Hong Kong, May 14, 2021 -- Moody's Investors Service has affirmed the Baa2 issuer rating of
China State Construction International Holdings Limited (CSCI).
Moody's has also affirmed the Baa2 ratings on the senior unsecured notes
and senior unsecured perpetual securities issued by China State Construction
Finance (Cayman) II Ltd and China State Construction Finance (Cayman)
I Ltd, respectively, and guaranteed by CSCI.
At the same time, Moody's has affirmed the Baa3 ratings on
the subordinated perpetual notes issued by China State Construction Finance
(Cayman) III Ltd, and also guaranteed by CSCI.
Moody's has also lowered the standalone credit strength of CSCI and changed
the parental support rating uplift to CSCI from China State Construction
Engineering Corporation (CSCEC) to three notches from two.
The outlook on the ratings remains stable.
"The affirmation of CSCI's ratings reflects our expectation that
strong parental support from CSCI's ultimate parent mitigates the
company's increasing leverage amid coronavirus-induced disruptions.
We expect its leverage to remain elevated over the next one to two years
due to slow EBITDA growth as its investments decelerate,''
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
CSCI's Baa2 issuer rating incorporates its standalone credit strength
and a three-notch uplift based on Moody's expectation of strong
support from its ultimate parent CSCEC -- the largest construction
company by revenue in China and 100% owned by the Chinese government
(A1 stable).
CSCI's standalone credit strength is supported by its (1) solid operating
track record and strong market position in the construction sector in
Hong Kong SAR and Macau SAR; (2) business visibility owing to its
strong order backlog; and (3) proven access to onshore and offshore
debt and equity markets.
On the other hand, the company's credit profile is constrained by
(1) its relatively small business scale and limited diversification;
(2) the increasing debt and operational risks associated with its investments
in infrastructure projects; and (3) rising execution risks associated
with large-scale projects.
CSCI's leverage -- as measured by adjusted debt/EBITDA --
was higher than our expectation at 6.9x in 2020, up from
5.4x in 2019. The leverage increase was driven by an EBITDA
decline due to minimal revenue growth and cost hikes amid coronavirus
disruptions in HK, Macau and mainland China; and to a lesser
extent, due to higher debt.
Moody's expects the company's leverage to slightly improve
to around 6.5x over the next one to two years as businesses'
performance gradually normalize. Leverage will also improve on
the back of the company's controlled debt growth through scaling
down investments in long-term public-private partnership
(PPP) projects in mainland China, and increasing cash usage efficiency
and asset turnover.
However, EBITDA growth will also be slow, as investments decelerate.
The projected leverage positions the company at a weaker standalone credit
strength, in particular in view of the company's comparatively
small scale.
That said, Moody's expects CSCI's weakened standalone
credit strength to be mitigated by the likely strong support from its
parent. Moody's expectation of strong parental support reflects:
(1) CSCI's role as CSCEC's only platform for developing construction projects
in Hong Kong SAR and Macau SAR and for raising offshore funds for infrastructure
and construction projects in mainland China, (2) the parent's track
record of providing financial support to CSCI, and (3) the integral
role that CSCI plays in the CSCEC group by working closely with its onshore
subsidiaries on construction projects under the "CSCEC" umbrella.
The ratings also take into account the following environmental,
social and governance (ESG) considerations.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
Regarding governance considerations, Moody's takes into account
the fact that CSCI is ultimately controlled, supervised and monitored
by CSCEC, which is a government-owned entity under the State-owned
Assets Supervision and Administration Commission (SASAC) of China.
As a listed company on the Hong Kong Stock Exchange, CSCI provides
good disclosure of its businesses and financial performance. The
company is led by an experienced management team in the construction industry
with a sound track record of project execution. The company also
seeks to control its leverage growth as per the government's oversight
and directive to deleverage.
The stable ratings' outlook reflects Moody's expectation that over
the next 12-18 months, CSCI's standalone credit profile will
remain stable, and there will be no material changes in its importance
to CSCEC, or in CSCEC's ability to provide support.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade CSCI's issuer rating if the company's standalone
credit profile improves and CSCEC's ability to provide support strengthens.
CSCI's standalone credit profile could improve if the company (1) strengthens
its market position and broadens its business scale; (2) maintains
strong sales visibility while keeping a prudent investment strategy;
(3) continues its strong business execution without major cost overruns
or delays; and (4) improves its debt leverage.
Credit metrics indicative of an upgrade include adjusted CSCI's debt/EBITDA
falling below 6.0x on a sustained basis.
Moody's would downgrade CSCI's issuer rating if the company's standalone
credit strength weakens or if there are signs of weakening support from
CSCEC.
CSCI's standalone credit strength could come under pressure if (1) the
company faces significant execution risks, such as cost overruns
or project delays, which negatively affect its profitability or
cash collections; (2) its order backlog falls below 1.0x of
total annual sales; and (3) its key credit metrics weaken.
Credit metrics indicative of a downgrade include adjusted debt/EBITDA
remaining above 7.0x-7.5x for a prolonged period.
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.
Listed on the Hong Kong Stock Exchange since July 2005, China State
Construction International Holdings Limited (CSCI) started its operations
in Hong Kong in 1979 and is now one of the largest construction contractors
in Hong Kong SAR and Macau SAR. The company expanded its operations
into mainland China in 2007. Its business in the mainland consists
of affordable housing and infrastructure projects.
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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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
