Hong Kong, August 28, 2018 -- Moody's Investors Service has assigned a first-time A2 issuer rating
to Shenzhen Investment Holdings Co., Ltd. (SIHC).
The ratings outlook is stable.
RATINGS RATIONALE
SIHC's A2 issuer rating considers its baseline credit assessment (BCA)
of baa2 as well as the potential for support in times of stress,
based on the assumption of a very high dependence on and high level of
support from its local government owner, which results in a rating
that is three notches above its BCA.
This approach -- which considers first the company's standalone
profile - recognizes that the entity is not guaranteed by its local
government owner, which is not obliged to directly support the company's
debt.
However, given its importance we expect there is a high likelihood
that the company will receive support to stabilize its credit profile
in times of need. This support could take the form of government
subsidies, capital or asset injections, bank lending from
state-owned institutions, or other means.
Moody's support assessment reflects SIHC's important role as a key
state-owned capital investment company for the Shenzhen Government
which owns 100% of the company. The support assessment also
considers the reputational and contagion risks that may arise if it were
to default, given SIHC's status as an important functional
state-owned enterprises (SOEs) and the largest SOE in Shenzhen
in terms of asset, revenue and profit contribution.
As such, we believe the relevant authorities would support efforts
by the city to seek ways to prevent SIHC from defaulting and thus avoid
the risk of disruption to the domestic financial market that might occur
otherwise.
SIHC is mandated by the Shenzhen Government to undertake the important
policy mandates of developing high-tech industrial parks in Shenzhen,
holding important state-owned assets on behalf of the government,
and providing public and social welfare services, including toll
roads, education and sports venues. This situation has prompted
Moody's to categorize the company in the "Commercial Public Sector".
Moody's believes that SIHC is likely to be supported in times of need,
based on the following considerations:
1. The development of a hi-tech industrial park is important
for Shenzhen to attract high quality investments so as to maintain Shenzhen's
leadership in hi-tech and innovative industries in China.
2. The holding of large investments in the financial service sector
and the mandate to manage a number of government-led investment
funds support Shenzhen as one of the largest financial centers in China
and, for the city, play a key role in the development of the
Big Bay Area, including Guangdong Province, Hong Kong and
Macao, which is further a national strategy.
3. The Shenzhen Government has provided SIHC with sizable capital
injections averaging around RMB3 billion every year during 2015-2017,
in addition to frequent injections of state-owned assets.
These factors are counterbalanced by the uncertainty arising from ongoing
changes in the central government's policy regarding support from
regional and local governments to their SOEs.
The BCA of baa2 is underpinned by SIHC's low leverage, as
measured by market value-based leverage (MVL), good quality
of its underlying investments and sound liquidity profile.
Moody's estimates that SIHC had adjusted portfolio value of around RMB197
billion at the end of 2017 and around 70% of its investments by
portfolio value are listed equities.
Its major investments, such as Ping An Insurance (Group) Company
of China. Ltd. (which holds Ping An Life Insurance Company
of China, Ltd. (A2 insurance financial strength rating (IFSR),
stable), Ping An P&C Insurance Company of China, Ltd.
(A2 IFSR, stable) and Ping An Bank Co., Ltd (Baa2 long-term
deposit rating, stable), Guotai Junan Securities Co.,
Ltd. (Baa1, stable) and Shenzhen International Holdings Limited
(Baa2, stable) all have good credit quality and contribute stable
dividend income to SIHC.
Besides investment activities, SIHC's also conducts industrial
park development and rental business at its holding company level.
SIHC has a strong niche market position in these businesses and also gets
strong operational support from the Shenzhen Government.
SIHC maintains a solid financial profile at the holding company level.
It had a low adjusted MVL, as measured by net debt to estimated
portfolio value of around 10.1% at the end of 2017.
SIHC also has strong recurring cash flow at the holding company level,
with a recurring FFO (fund flow from operation)/interest coverage of 4.1x
in 2017. The recurring cash flow includes dividends and interest
income from its investees, sales proceeds and rental income from
its industrial park business.
The BCA is, however, constrained by the its high business
and geographic concentration, moderate credit contagion risk from
its major investees and execution risk from new investments.
SIHC's investment portfolio is heavily exposed to financial service
sectors in China. However, we expect the financial condition
and performance of its investees in financial service sectors will remain
stable in next 18 months, based on our outlook for financial service
sectors in China.
We also expect SIHC will substantially increase its investment scale in
next 2-3 years. For example, SIHC announced to acquire
91% stakes in Hopewell Highway Infrastructure Limited for HKD13.5
billion in May 2018.
Such investments will weaken SIHC's credit metrics. We estimate
SIHC's adjusted MVL will rise to around 15% by 2020 from
around 10.1% at end of 2017 and its adjusted FFO Interest
coverage to decline to around 2.7x from around 4.1x during
the same period. Nevertheless, such metrics remain appropriate
for its baa2 BCA.
As a state-owned capital investment platform designated by the
Shenzhen Municipal Government, we expect SIHC's investment
will focus on fulfillment of government policy mandates rather than chasing
high return. We also expect SIHC will get financial or policy support
for its investments if they will negatively impact SIHC's financial
condition.
SIHC has a sound liquidity profile at the holding company level,
supported by its holding of around RMB9 billion in cash and around RMB90
billion in financial assets, compared with RMB7.6 billion
in short-term debt at the end of 2017. SIHC also has strong
access to bank credit and the capital markets, because of its status
as a high profile SOE owned by the Shenzhen Government.
The ratings outlook is stable, reflecting Moody's expectations that
over the next 12-18 months: (1) SIHC's credit metrics will
be maintained at the levels that are appropriate for its BCA; and
(2) SIHC's importance to the Shenzhen Government and the government's
ability to provide support will remain intact, the latter of which
is mirrored in the stable outlook on the sovereign rating.
SIHC's ratings will likely be upgraded if (1) the Shenzhen Government's
ability to support SIHC strengthens, a situation which would be
illustrated by an upgrade of China's sovereign rating, and (2) there
is an improvement in SIHC's BCA.
SIHC's BCA could be upgraded if there is a material improvement
in SIHC's investment portfolio, including the enhancement
of key investees' credit quality, and stronger business and
geographic diversification of its investment portfolio.
Credit metrics that will lead to an upgrade of its BCA include adjusted
MVL below 10% and FFO/interest coverage higher than 4.0x-4.5x
on a sustained basis.
Absent any change in Moody's support assessment, an improvement
of SIHC's BCA alone will not likely result in a rating upgrade as
SIHC's A2 rating is at the high end of the possible rating range
in terms of Moody's support assessment.
SIHC's ratings will be downgraded if the company's BCA is lowered without
any material change of the support assessment. Such situation would
result from aggressive debt-funded investments, or a substantial
weakening of the credit quality of its major investees,.
Credit metrics indicative of downward pressure on its BCA include adjusted
MVL in excess of 20%-25% and FFO/interest coverage
lower than 2.0-2.5x.
A downgrade of SIHC's rating -- without a lowering of its BCA
-- could also be triggered by a change in Moody's support assessment,
for example, if SIHC expands its investments in return-driven
commercial activities, leading to a reduction in its strategic importance
to the Shenzhen Government , or 2) the Shenzhen Government's ability
to support the company weakens, which would be illustrated by a
downgrade of China's sovereign rating.
The methodologies used in these ratings were Investment Holding Companies
and Conglomerates published in July 2018, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Established in 2004, Shenzhen Investment Holdings Co.,
Ltd. is a wholly state-owned investment holding company
under the Shenzhen. SIHC's investment portfolio had an estimated
adjusted portfolio value of around RMB197 billion at the end of 2017.
Its investments include companies in the financial services, transportation
and logistics, industrial parks, real estate, construction,
manufacturing, education, culture and human resources services.
The local market analyst for this rating is Kai Hu, +86 (21)
2057-4012.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 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
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For provisional ratings, this announcement 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 case where the transaction
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rating in a manner that would have affected the rating. For further
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
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if applicable to jurisdiction: Ancillary Services, Disclosure
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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.
Gloria Tsuen, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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Client Service: 852 3551 3077
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