Hong Kong, December 14, 2022 -- Moody's Investors Service has affirmed Yiwu State-owned Capital Operation Co., Ltd.'s (YSCO) Baa3 issuer rating and the Baa3 backed senior unsecured rating of the USD notes issued by Chouzhou International Investment Limited and guaranteed by YSCO.
The ratings outlook remains stable.
"The rating affirmation reflects our expectation that the Yiwu government will maintain its propensity to support YSCO, given the company's ultimate control by the Yiwu government and its status as the largest state-owned enterprise (SOE) in Yiwu city by asset size with a dominant role in providing essential public services," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
YSCO's Baa3 issuer rating incorporates the Yiwu city's governmental capacity to support (GCS) score of baa2; and Moody's assessment of how YSCO's characteristics affect the Yiwu government's propensity to support, resulting in a one-notch downward adjustment to the GCS score.
Moody's assessment of the Yiwu government's capacity to support reflects Yiwu's status as a county-level city, one of the lower administrative levels in the rating agency's assessment of the hierarchy of regional and local governments (RLGs) in China (A1 stable) and Yiwu's relatively high state-owned enterprise (SOE)-related contingent liability risks.
The Yiwu government's propensity to support YSCO considers the company's ultimate control by the Yiwu city government; its status as the largest SOE in Yiwu city by asset size; the company's dominant role in providing essential public services, including affordable housing, public infrastructure projects, urban utility services and public transportation; its track record of government payments; and its strong access to funding.
However, the one-notch downward adjustment from Yiwu government's GCS score reflects the contingent risk related to the external guarantees provided to other local SOEs in Yiwu, and YSCO's debt position compared with government payments.
YSCO is the largest SOE by asset size in Yiwu. It is the dominant platform of the Yiwu government that manages and operates around 90% of the city's state-owned assets, including infrastructure construction, public service provision, affordable housing project development and the operation of trading centers for small commodities. In addition, the company has a monopoly in the city's urban utility services and public transportation. Under the 14th five-year plan, YSCO is also undertaking more urban upgrade projects to support local community development, with an aim to build Yiwu city into a modern and environmentally-friendly place to live in.
YSCO has a track record of receiving government cash payments in the form of government buybacks of infrastructure projects, government bond allocation, operating subsidies, and capital injections. Moody's expects the government support will continue to match YSCO's investment in local infrastructure projects and help improve the company's debt management in future years.
The company has maintained strong funding access to capital markets over the past 24 months. Moody's expects YSCO will continue to benefit from the credit differentiation trend in the local government financing vehicle (LGFV) sector, whereby investors prefer LGFVs in developed regions like YSCO, resulting in lower funding costs.
The company's existing commercial businesses, such as leasing, trading and property development, are complementary to its existing policy mandates with manageable risk profiles. YSCO could receive sustainable rental income from the leasing of small commodity trading centers.
YSCO's rating also considers the following environmental, social and governance (ESG) factors.
YSCO has a neutral to low credit exposure to environmental risks, highly negative credit exposure to social risks, and moderately negative credit exposure to governance risks. The effect of these considerations on the rating can only be partially mitigated by the expected support from the Yiwu government.
YSCO's neutral to low environmental risk exposure is driven by a neutral to low exposure to physical climate risks in Yiwu city, in terms of the impact of extreme weather patterns on its urban construction projects.
YSCO's highly negative social risk exposure is common among most LGFVs and relates to demographic and societal trends. Population growth and demographic and societal trends shape the company's development targets and affect the Yiwu government's propensity to support the company.
YSCO's moderately negative governance risk exposure is associated with its financial strategy and risk management, and management credibility and track record – in particular its debt to support the public policy investments with a fair mechanism of government payments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on YSCO's rating reflects the stable outlook on China's A1 sovereign rating; Moody's expectation that Yiwu city's GCS will remain stable, and that the company's business profile as well as integration with, and control and oversight by the Yiwu government will remain mostly unchanged over the next 12-18 months.
Moody's could upgrade the rating if China's sovereign rating is upgraded; the Yiwu government's GCS score improves because of a significant strengthening in the city's economic or financial profile or its ability to coordinate timely support; or if YSCO's characteristics change in a way that strengthens the Yiwu government's propensity to support, such as an increase in government payments and improvement in the predictability of the government payment mechanism. For example, dedicated fiscal budget allocations and transfers from higher-tier governments, such that government payments can consistently cover a large share of its operational and debt servicing needs, would strengthen the government's propensity to support.
Moody's could downgrade the rating if China's sovereign rating is downgraded; the Yiwu government's GCS score weakens, which could be a result of a significant weakening of the city's economic or financial profile or its ability to coordinate timely support; changes in the Chinese government's policies prohibit RLGs from providing financial support to LGFVs; or if the company's characteristics change in a way that weakens the Yiwu government's propensity to support, such as:
- Significant changes in its businesses, including substantial expansion into commercial activities at the cost of public services, or substantial losses in commercial activities
- A decline in its position as the largest and dominant public service provider in Yiwu city
- Rapid increases in its debt and leverage, with less corresponding government payments
- A significant increase in loans, guarantees or other credit exposures to external parties, where the contingent liabilities will account for a high proportion of its equity base
The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Yiwu State-owned Capital Operation Co., Ltd. (YSCO) is 90.56% owned by the Yiwu government and 9.44% owned by Zhejiang Financial Development Co., Ltd. The company is mainly engaged in various essential public services, including urban infrastructure construction, shantytown renovation, affordable housing projects, and the provision of urban utility services and public transportation. The company is the largest SOE in the city, accounting for around 90% of the Yiwu government's state-owned assets. As of the end of 2021, YSCO had total reported assets of RMB220 billion and total reported revenue of RMB29 billion.
The local market analyst for these ratings is Sarah Xu, +86 (21) 2057-4030.
REGULATORY DISCLOSURES
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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
Ivan Chung
Associate Managing Director
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
