Hong Kong, February 05, 2018 -- Moody's Investors Service has assigned a first-time A3 issuer rating
to Shandong Hi-speed Group Co., Ltd (SDHG).
The rating outlook is stable.
RATINGS RATIONALE
SDHG's A3 issuer rating primarily combines: (1) its ba2 baseline
credit assessment (BCA); and (2) Moody's assessment of a very
high likelihood that the company will receive extraordinary support from
the Shandong Provincial Government, in times of need. Such
an assessment results in a five-notch uplift to the company's final
rating.
"The A3 issuer rating reflects SDHG's status as the Shandong
Provincial Government's core transportation infrastructure platform,
which is supported by its role as the provincial government's sole
platform for railway investment," says Osbert Tang,
a Moody's Vice President and Senior Analyst.
"Such public policy activity is expected to grow significantly over
the next three years, underpinning the company's very high
strategic importance," adds Tang, who is also Moody's
Local Market Analyst for SDHG.
SDHG had also captured a 30% market share of Shandong's toll
road sector, and had 989 kilometers of expressway under planning
and construction as at the end of December 2017.
Moody's assessment of extraordinary support from the Shandong Provincial
Government to SDHG in times of need reflects SDHG's 100%
ownership by the provincial government and the company's hybrid
public policy and commercial public role in the railway and toll road
sectors in Shandong Province. Moody's points out that SDHG's
railway business, which includes high speed rail projects,
is of critical importance to the province, because of its role in
connecting various key cities within Shandong and across other provinces.
While Moody's has classified SDHG as a "commercial public sector"
entity, Moody's believes there is a very high likelihood that
the company will receive extraordinary government support, if needed,
due to SDHG's growing public policy role.
Moody's support assessment also factors in the Shandong Provincial
Government's strong ability to provide support, given that its credit
quality — as one of the upper-tier regional and local governments
with national strategic importance — is closely connected to that
of the sovereign.
SDHG also has a track record of receiving financial support from the Shandong
Provincial Government for its railway and toll road projects. Between
2014 and 2016, SDHG received government equity injections,
grants and subsidies exceeding RMB16.3 billion.
Moody's estimates that SDHG will incur average annual capital expenditure
of RMB63 billion during 2017-2019, with more than half of
such spending for the investment in the railway business segment,
particularly for the Jinan-Qingdao high-speed railway and
Southern Shandong high-speed railway, in which SDHG owns
controlling stakes.
SDHG's toll roads are all strategically located in Shandong,
connecting the province's major cities including Jinan, Qingdao,
Weifang and Laiwu. These highways include the Jinan-Qingdao
Expressway, Jinan-Laiwu Expressway and Weifang-Laiwu
Expressway.
Moody's points out that SDHG's BCA of ba2 primarily reflects:
(1) its status as the core transportation infrastructure platform of Shandong
Province; and (2) the proven track record of equity injection,
as well as grants and subsidies from the local government.
However, SDHG's BCA is constrained by: (1) the commercial
nature of its non-railway and non-toll road businesses,
which entail higher risks and show weaker credit profiles; (2) its
high financial leverage and sizeable capital expenditure pipeline,
based on the government's railway and toll road expansion plans;
and (3) the lack of a transparent tariff adjustment mechanism and evolving
regulatory regime in its toll road business.
Moody's explains that SDHG consolidates Weihai City Commercial bank,
in which it owns only a 47.15% stake. The bank's
standalone credit quality is weaker than that of SDHG's non-financial
business segments, because the bank's operations are more
volatile than SDHG's core railway and toll road businesses.
SDHG also engages in other businesses, including construction engineering,
port and marine transportation, trading and logistics and real estate.
Moody's expects that SDHG's credit metrics will stay weak over with
next 12-18 months, with adjusted funds from operations (FFO)
to debt registering between 2% and 4%, primarily due
to the heavy capital spending for its railway and toll road projects.
The stable rating outlook incorporates Moody's expectations that
over the next 12-18 months, SDHG's: (1) credit metrics
will be maintained at levels that are appropriate for its ba2 BCA level;
and (2) key commercial public sector role and the Shandong Provincial
Government's ability to provide support will remain intact. The
Shandong Provincial Government's ability to provide support is mirrored
in the stable outlook on China's sovereign rating.
Moody's could upgrade SDHG's rating if its BCA improves,
without any material change in the support assessment.
Moody's would raise SDHG's BCA if the company improves its financial
profile, such that adjusted FFO/debt exceeds 7% on a sustained
basis, if such improvement is primarily driven by its non-financial
business segments.
Moody's could upgrade the rating, without a corresponding
improvement in the BCA, if the company's public policy role
further strengthens or the Shandong Provincial Government's ability
to provide support improves; the latter of which would be evidenced
by an upgrade of the sovereign rating.
SDHG's rating would be downgraded, if its BCA weakens because
of a material deterioration in its business or financial profile,
without any material change in the support assessment. The BCA
could be lowered if: (1) the company takes on more aggressive debt-funded
capital expenditure; and/or (2) the company shows an inability to
control the risks associated with its non-railway and non-toll
road businesses.
Credit metrics indicative of downward pressure on the company's BCA include:
adjusted FFO/debt falling below 1% on a sustained basis,
if such deterioration is primarily driven by its non-financial
business segments.
A downgrade of SDHG's rating, without lowering the BCA, could
also be triggered by a reduction in SDHG's strategic importance
to the Shandong Provincial Government or a weakening of the provincial
government's ability to provide support to the company; the
latter of which would be evidenced by a downgrade of the sovereign rating.
The methodologies used in this rating were Government Owned Toll Roads
published in November 2016, and Government-Related Issuers
published in August 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
Shandong Hi-speed Group Co., Ltd (SDHG) is a mega
transportation platform for Shandong Province, with its main businesses
in toll roads, railway, construction engineering, port
and marine transportation, trading and logistics. It also
engages in financial and real estate businesses. SDHG owns a 47.15%
share in Weihai City Commercial Bank, making it the bank's
largest shareholder.
In terms of operating length, SDHG is the second largest toll road
operator in Shandong Province. At the end of 2016, SDHG operated
a toll road portfolio with a total mileage of 2,665 kilometers,
of which, 1,573 kilometers were in Shandong; representing
a market share of approximately 30% in the province. The
remaining toll roads were located in the provinces of Sichuan, Yunnan,
Hunan, Hubei and Henan.
SDHG is mandated by the Shandong Government as the province's sole
platform for investing in national railways. At the end of 2016,
SDHG invested in 2,793 kilometers of national trunk railway and
operated local railway systems totaling 554 kilometers in length.
SDHG is 100% owned by the Stated-owned Assets Supervision
and Administration Commission of Shandong Province. The company
is the largest provincial state-owned enterprise (SOE) in Shandong
Province, accounting for 23% of the total assets and 25%
of total profits for Shandong's provincial SOEs as of 31 December
2016.
The Local Market Analyst for this rating is Osbert Tang, +86
(21) 2057-4019.
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
credit ratings from the support provider's credit rating.
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
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.
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
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.
Ada Li
Vice President - Senior Analyst
Project & Infrastructure Finance
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
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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
