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Rating Action:

Moody's assigns Baa1 for proposed bonds guaranteed by Beijing Enterprises

 The document has been translated in other languages

03 Apr 2012

Hong Kong, April 03, 2012 -- Moody's Investors Service has assigned a Baa1 rating for the proposed senior unsecured notes to be issued by Talent Yield Investments Limited and guaranteed by Beijing Enterprises Holdings Limited.

At the same time, Moody's has affirmed Beijing Enterprises' Baa1 issuer rating.

The outlook for both ratings is stable.

RATINGS RATIONALE

Talent Yield Investments Limited is a special purpose vehicle incorporated in the British Virgin Islands by Beijing Enterprises.

Beijing Enterprises expects to use the proceeds from the issuance to refinance existing debt and for general working capital requirements.

"After the proposed bond issuance, Beijing Enterprises' debt leverage -- on a pro forma basis, as measured by debt/total capitalization -- will remain at around 35%-40%, which is within the current Baa1 range," says Ivan Chung, a Moody's Vice President and International Analyst for Beijing Enterprises.

Beijing Enterprises' Baa1 rating is underpinned by its 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.

The rating also considers operational support from the Beijing government, the company's major shareholder. Furthermore, Beijing Enterprises' financial profile is in line with that of a solid Baa-rated company.

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.

In 2011, Beijing Enterprises' main business segments enjoyed stable growth, and operating results were in line with Moody's expectations. Although capex was higher than expected -- due to large investments in Beijing's gas segment and higher debt following a USD bond issuance in 2011 -- leverage ratios have stayed below Moody's triggers for a downgrade, and which include debt/total capitalization of more than 40% and FFO/debt below 15%-20%.

In 2012, Moody's expects that Beijing Enterprises will focus on the growth of its piped gas, brewery and solid waste segments through investments and acquisitions.

For instance, the company's unit, Yanjing Beer, has proposed to acquire Kingway Beer. If the deal is completed, it will strengthen the business franchise of Yanjing. As there are still major uncertainties regarding the success of Yanjing's bid, the final acquisition premium, and the funding arrangements, Moody's will evaluate the impact when further details are available.

Excluding the potential impact of Kingway acquisition, Beijing Enterprises' financial profile will remain largely unchanged.

Beijing Enterprises has exhibited a sound liquidity profile. As of 31 December 2011, it had HKD12.6 billion in consolidated cash on its balance sheet, which is expected to cover its maturing debt in 2012, dividend payments, and its own annual capex budget. In addition, its large bank facility and new bond issuance will provide ample buffer for its cash needs.

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

Upward rating pressure could evolve over time if: 1) there are no material changes to Beijing Enterprises' 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%.

On the other hand, downward rating pressure could evolve if: 1) Beijing Enterprises' 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 Beijing Enterprises 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.

Beijing Enterprises Holdings Limited 's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Beijing Enterprises Holdings Limited 's core industry and believes Beijing Enterprises Holdings Limited 's ratings are comparable to those of other issuers with similar credit risk.

Other factors used in this rating are described in Analytical Considerations in Assessing Conglomerates published in September 2007.

Beijing Enterprises Holdings Limited was founded in 1997 by the Beijing municipal government and is 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).

Beijing Enterprises is an investment holding company. It operates through three key business segments: pipeline gas operations, beer brewing, and sewage and water treatment services. As of 2011, total sales amounted to HKD30.4 billion with net income of HKD3.7 billion.

The Local Market analyst for this rating is Ping Luo, +852 3758-1353.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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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.

Ivan Chung
Vice President - Senior Analyst
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's assigns Baa1 for proposed bonds guaranteed by Beijing Enterprises
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