Hong Kong, August 01, 2019 -- Moody's Investors Service has affirmed the A3 issuer rating of Guangzhou
City Construction Investment Group Co., Ltd.
At the same time, Moody's has changed the rating outlook to
negative from stable.
RATINGS RATIONALE
"The negative outlook reflects the higher-than-expected
leverage of Guangzhou City Construction after the consolidation of Guangzhou
Industrial Fund Management Co. Ltd.," says Chenyi
Lu, a Moody's Vice President and Senior Credit Officer, and
also Moody's International Lead Analyst for Guangzhou City Construction.
Moody's points out that the consolidation happened following the
Guangzhou government's decision to transfer its 100% ownership
in Guangzhou Industrial Fund to Guangzhou City Construction.
Guangzhou City Construction's key credit metrics, including
adjusted (funds from operations [FFO] + interest)/interest and
adjusted debt/capitalization weakened to 1.7x and 39% respectively
in 2018; levels which were below Moody's previous expectations.
"The negative outlook further reflects the uncertainty as to the
company's ability to deleverage meaningfully over the next 12-18
months, because of large capex investments," adds Cindy
Yang, a Moody's Vice President and Senior Analyst, and who
is also Moody's Local Market Analyst for Guangzhou City Construction.
Guangzhou City Construction's capex investment will likely increase
to RMB35-RMB40 billion in 2019 from around RMB10 billion in 2018.
Moody's expects that the majority of the capex will be funded by
debt and partly supplemented with the company's cash on hand,
operating cash flow and recurring government grants.
As a result, Guangzhou City Construction's projected debt
level will further increase to around RMB90 billion in 2019 from RMB66
billion in 2018.
Moody's is also concerned with the low transparency related to the
underlying asset quality of Guangzhou Industrial Fund, as well as
Guangzhou City Construction's expansion into the new copper trading
business.
While the copper trading business will boost the company's operating
scale, it also increases Guangzhou City Construction's risk
exposure to the volatile commodity trading business.
Moody's expects the company's (adjusted FFO + interest)/interest
and adjusted debt/capitalization will likely stay at 1.6x-1.8x
and 45%-50% over the next 12--18 months,
in the absence of meaningful capital contributions from the government.
Such levels are weak for its Baseline Credit Assessment (BCA) of ba1.
The affirmation of Guangzhou City Construction's A3 rating factors in
the expected high level of support from and high level of dependence on
the Government of China (A1 stable) in the event of financial stress,
resulting in a rating four notches higher than its BCA.
This high support assessment reflects (1) Guangzhou City Construction's
commercial public sector role as the core urban and infrastructure development
platform in Guangzhou; (2) the company's 100% ownership
by the Guangzhou government; (3) a track record of receiving large
fund allocations from the government's budgets, including
the funding of RMB29.6 billion from the Guangzhou government to
repay all its remaining Class 1 government debt in 2018; and (4)
the close integration with the Finance Bureau and other city bureaus.
Guangzhou City Construction is in the process of negotiating with the
Guangzhou government to seek further funding support and the injection
of good quality assets to support the integration of Guangzhou Industrial
Fund, as well as other policy-mandated investments,
which will help alleviate any funding pressure the company may face.
Guangzhou City Construction's BCA of ba1, primarily reflects
its (1) large asset base; (2) strong access to domestic funding;
and (3) increasing leverage, driven by investments used to support
policy projects.
In terms of environmental, social and governance factors,
the A3 rating also considers: (1) the company's modest risk exposure
to environmental risk and changing demographics and consumer preferences,
mitigated by its diversified business profile and the likelihood of strong
government support, and (2) the low transparency on its financial
policy and investment strategy, mitigated by its full ownership,
supervision and close monitoring by the government.
The outlook could return to stable if Guangzhou City Construction (1)
maintains its key role in the development of urban and infrastructure
projects in Guangzhou; (2) manages well the integration of the Guangzhou
Industrial Fund; (3) prudently manages its capex investments;
(4) receives meaningful capital contributions from the government to improve
its debt leverage, such that (adjusted FFO + interest)/interest
stays above 3.5x, and adjusted debt/capitalization below
40% on a sustained basis.
Moody's would downgrade Guangzhou City Construction's rating if the company's
BCA deteriorates due to: 1) its aggressive expansion into the copper
trading business and Guangzhou Industrial Fund incurring substantial losses;
thereby increasing its risk profile, or 2) the company's inability
to balance the cash generation capabilities and financing needs of its
investment programs.
Credit metrics indicative of a lower BCA include (adjusted FFO +
interest)/interest staying below 3.5x, and adjusted debt/capitalization
above 40% on a sustained basis.
Moody's could also downgrade Guangzhou City Construction's rating,
without lowering its BCA, if Moody's assesses that government support
for the company has weakened.
The methodologies used in these ratings were Business and Consumer Service
Industry published in October 2016, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Guangzhou City Construction Investment Group Co., Ltd was
established in 2008, and is 100% directly owned by the Guangzhou
government. The company is the core urban and infrastructure development
platform for the Guangzhou government. Other businesses include
finance leases, property development and the operation of state-owned
assets.
Guangzhou Industrial Fund Management Co. Ltd. was established
in 2013 as the Guangzhou government's key investment and financing
platform to facilitate the upgrade of Guangzhou's industries and
also urban development.
In 2018, the Guangzhou government transferred its 100% ownership
in Guangzhou Industrial Fund Management Co. Ltd. to Guangzhou
City Construction.
The local market analyst for these ratings is Cindy Yang, +86
(10) 6319-6570.
REGULATORY DISCLOSURES
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
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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
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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
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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.
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Regulatory disclosures contained in this press release apply to the credit
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Please see www.moodys.com for any updates on changes to
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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
