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Rating Action:

Moody's assigned first-time Baa1 rating to Beijing Enterprises

28 Apr 2011

Hong Kong, April 28, 2011 -- Moody's assigns Baa1 issuer rating to Beijing Enterprises Holding Limited and its proposed USD senior unsecured notes; outlook stable

Moody's Investors Service has today assigned a Baa1 issuer rating to Beijing Enterprises Holding Limited (BEHL) and a Baa1 rating to its proposed USD senior unsecured bond issuance.

This is the first-time that Moody's has assigned a rating to BEHL.

The ratings outlook is stable.

The proceeds from the proposed issuance will be used for refinancing existing loans and other general corporate purposes.

RATINGS RATIONALE

The Baa1 rating is underpinned by BEHL's diversified business portfolio, the monopolies or leading positions of its key subsidiaries in non-cyclical or regulated segments, and its sound track record of balancing growth and financial health.

"Its key business segments, primarily in piped gas, beer brewery, and sewage and water treatment, generate stable cash flow, and provide some business diversification benefits," says Kai Hu, a Moody's Vice President.

"In addition, its key subsidiaries all have strong positions in their respective markets. Its 100%-owned Beijing Gas -- one of the largest piped gas companies in China, and which contributed over 60% of earnings in FY2010 -- has exclusive rights to distribute natural gas in Beijing, China's capital. Beijing Gas is strategically important to the government," says Hu, also lead analyst for BEHL.

"Beijing Gas also has a solid financial and operating profile which provides key support to the Baa1 rating," says Hu.

Another majority owned subsidiary, Yanjing Beer, is the third largest beer company in China (in terms of sales volume), with dominant market shares in Beijing and a few other provinces.

"Its businesses will continue to enjoy good growth prospects, benefiting from rising affluence, urbanization, and the government's policy to encourage the use of natural gas, which is more environmentally friendly," continues Hu.

The rating also considers operational support from the Beijing government, BEHL's major shareholder. Such support includes the granting of city gas and water utility concession rights to BEHL. It also included the injection of Beijing Gas into the company during a business restructuring in 2005-2007. The action greatly improved BEHL's operating and credit profiles.

Furthermore, the rating reflects BEHL's sound financial profile. It reported Adjusted debt/capitalization, FFO(Funds from operations) /Debt, and FFO/Interest coverage at 31%, 24% and 9x in FY2010, in line with a solid Baa-rated company. In calculating these ratios, Moody's made standard adjustments which include operating lease , contingent liabilities, and the pro-rata share of Beijing Enterprises Water's debt.

Despite a large capital spending plan, Moody's expects that BEHL will continue to manage its financial profile prudently and fund most of its capex by operating cash flow and, if necessary, by raising new equity, such that its financial profile will remain appropriate for its rating level.

BEHL has a solid liquidity profile. The company has maintained an average of HK$ 9 bn consolidated cash on hand over the past few years. In addition, BEHL has good access to capital and bank markets, given Beijing government ownership.

On the other hand, the rating is constrained by: 1) the risks associated with the evolving nature of the natural gas and water utility regulatory framework in China; 2) the company's aggressive growth plan, and the large initial capex needed for its water utility and piped gas distribution and transmission businesses.

While Moody's considers the Beijing government's ownership as positive for the rating, there remains a level of uncertainty as to the possibility of asset injections or restructuring, as arranged by the Beijing government in the future. This could impact the business and financial profile of BEHL.

The stable outlook reflects BEHL's track record of prudent financial management in pursuing its growth strategy and Moody's expectation that its business portfolio will remain stable.

What Could Change the Rating-up

Upward rating pressure could evolve over time if: 1) there are no material changes to BEHL's business portfolio or business strategy, such that Beijing Gas and Yanjing Beer remain its key profit and cash flow contributors; 2) there is a track record of a more transparent regulatory framework, allowing timely automatic cost pass-through in its gas distribution and water utilities businesses; and 3) there is positive free cash flow on a sustained basis.

Credit metrics that Moody's would consider for an upgrade include Adjusted FFO/debt above 35-40%, and/or Adjusted debt/capital under 25%.

What Could Change the Rating --down

Downward rating pressure could evolve if : 1) BEHL's business portfolio and business strategy change materially, resulting in higher business risk; 2) it pursues large debt-funded acquisitions or capital spending; 3) there are significant adverse changes in regard to the regulatory regime, and which would negatively impact its profitability and cash flow; or 4) the Beijing government's ownership of BEHL falls below 50%.

The financial indicators that Moody's will look for in the case of a rating downgrade include Adjusted FFO/debt below 15-20%, and/or Adjusted debt/capital above 40% for a prolonged -period.

In addition, the rating would be notched down to reflect structural subordination risk if a substantial amount of debt is raised at the subsidiary level, such that the BEHL's total subsidiary and secured debt exceeds 15% of its total consolidated assets.

The Rating Methodology

The methodological approach applied in rating BEHL is "Analytical Considerations in Assessing Conglomerates", published in September 2007, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Rating Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating BEHL can also be found in the Credit Policy & Methodologies directory.

Beijing Enterprises Holdings Limited (BEHL) was founded in 1997 by Beijing government and was listed on Hong Kong Stock Exchange. It is controlled by Beijing Enterprises Group, which is 100% owned by the Beijing Municipal government and supervised by Beijing SASAC (Beijing State-owned Assets Supervision and Administration Commission). BEHL is an investment holding company. The company operates through three key business segments: pipeline gas operations, beer brewery and sewage and water treatment. As of 2010, the total sales amounted to HK$ 27.6 billion with net income of HK$ 3.1 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Hong Kong
Kai Hu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
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JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigned first-time Baa1 rating to Beijing Enterprises
No Related Data.
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