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Rating Action:

Moody's assigns first-time A3 rating to China Communications Construction Co Ltd

 The document has been translated in other languages

08 Jan 2015

Hong Kong, January 08, 2015 -- Moody's Investors Service has assigned a first-time A3 issuer rating to China Communications Construction Co. Ltd. (CCCC).

The rating outlook is stable.

RATINGS RATIONALE

"CCCC's A3 issuer rating incorporates its standalone credit strength, and a three-notch uplift, based on our expectation that the company will receive strong support from its parent, China Communications Construction Group Limited (CCCG, unrated) in times of stress," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

"CCCC's standalone credit strength in turn reflects its large scale and long track record," says Lu, who is also the Lead Analyst for CCCC.

Moody's points out that CCCC has a long track record of more than 60 years in the transportation infrastructure construction industry in China.

In 2013, the company was the fourth-largest global contractor by revenue; according to Engineering News-Record.

In China, CCCC is one of the largest road and bridge construction companies and a major port design and construction company. The company is involved in some of the most important and complex road, bridge, tunnel and port projects in China.

It is also one of the largest dredging companies globally, and according to WorldCargo News, CCCC is the largest global manufacturer of container cranes by ship-to-shore container gantry crane deliveries in 2013.

The company's ample backlog is another positive rating driver and provides good earnings and cash flow visibility over the next two years.

Its order backlog totaled RMB767 billion at 30 June 2014, or 2.2x the company's total revenues of RMB349 billion for the 12 months ended 30 June 2014.

CCCC's standalone credit strength also takes into account its diversified business portfolio, which includes the construction of roads, bridges, ports, waterways, railways and municipal rail transits. Such diversity alleviates business volatility and stabilizes its margins.

Moody's expects CCCC to have a stable adjusted EBITDA margin of 12% over the next two years, versus 12.8% for the 12 months ended 30 June 2014.

On the other hand, CCCC's standalone credit strength is constrained by: (1) the high execution risks associated with its overseas expansion; in particular, its involvement in large and complex projects; and (2) its increased investments in build and transfer (BT)/build, operate, and transfer (BOT) projects; such projects raise the company's debt levels and result in higher financial risks.

Moody's notes that CCCC's high execution risks associated with its overseas projects may be largely mitigated by its limited exposure in each foreign country. The company's operating experience and technical expertise in transportation and infrastructure construction overseas also help mitigate the risks.

The financial risks associated with CCCC's BT and BOT projects are partly mitigated by the good asset quality of projects in China. The company carefully selects its projects based upon its deep experience in the transportation and infrastructure construction industries. To limit liabilities from BOT projects, project finance is mostly arranged on a non-recourse basis.

CCCC's development of BT and BOT projects has resulted in high debt leverage. While its adjusted debt/EBITDA of 6.9x for the 12 months ended 30 June 2014 was high for its standalone credit strength, Moody's expects the company to deleverage over time.

Moody's believes CCCC will achieve lower levels of financial leverage by: (1) slowing down its investments in BT and BOT projects; (2) raising new equity; and/or (3) ramping up the profit contributions from BT/BOT projects currently under construction.

As for CCCG, Moody's expects the parent company to receive strong support from the Chinese government (Aa3 stable) in times of need, because: 1) CCCG is a state-owned enterprise wholly owned by the State Council of China; and 2) CCCG plays a significant role in the transportation infrastructure construction industry in China; an industry which is key to economic growth.

Moody's also expects that state support will flow through CCCG to CCCC, given that CCCC is its parent company's core subsidiary. The subsidiary is also strategically important to its parent, accounting for about 99% of its parent's revenue and about 96% of CCCG's total assets in 2013. Both companies share the same senior management team.

Moody's does not notch the issuer rating for subordination risk, notwithstanding subsidiary and secured debt amounting to 31% of consolidated group assets at end-June 2014. This approach reflects Moody's view that CCCC is likely to receive central government support in a financially distressed situation, through its parent, CCCG.

Moreover, such support would be provided directly to CCCC as the holding company of the group, thereby improving the position of holding company creditors over operating company creditors.

The stable outlook reflects Moody's expectation that CCCC will maintain its market share and EBITDA margins, and remain prudent in its BT/BOT investments and financial management, while expanding its operations. On 12 December 2014, CCCC entered into a binding agreement to acquire John Holland Group Pty (unrated) from Leighton Holdings Limited (Baa3, stable) for an enterprise valuation of about A$0.953 billion. John Holland provides engineering and contracting services to the infrastructure, energy and transport services sectors. This acquisition is in line with the CCCC's focus on infrastructure projects and its initiative to expand overseas.

The transaction is subject to final regulatory approval, and will not pose a material impact to its debt metrics given the company's scale.

Upward rating pressure is limited over the next two years, given CCCC's level of execution risks in its overseas expansions, and the high debt leverage associated with its BT and BOT projects.

Nevertheless, medium-term upward rating pressure could emerge if CCCC: (1) successfully expands its overseas business while minimizing execution risks; (2) maintains a prudent investment strategy when investing in BT/BOT projects; and (3) improves its debt leverage.

Credit metrics indicative of upgrade rating pressure would include adjusted debt/EBITDA below 5.0x or adjusted EBITDA/interest in excess of 4.0x on a sustained basis.

On the other hand, CCCC's rating will be downgraded if it: (1) makes aggressive investments in BT/BOT projects, resulting in a deterioration in its financial profile; (2) experiences a substantial decline in its new contracts, while its order backlog falls below 1.5x of total revenue; (3) incurs large cost overruns and delays in its project completion; and (4) there is evidence of weakening support from CCCG, or CCCG's credit profile significantly weakens, or if the parent company ceases to hold a controlling stake in CCCC.

The credit metrics indicative of downgrade rating pressure include adjusted debt/EBITDA in excess of 7.0x or an adjusted EBITDA/interest below 2.5x on a sustained basis.

The methodologies used in this rating were Construction Industry published in November 2014 and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Beijing, China Communications Construction Co. Ltd. operates four main business segments: 1) infrastructure construction: mainly the building of roads, bridges and ports; 2) infrastructure design; 3) dredging; and 4) the manufacture of heavy machinery.

It is 63.8%-owned by China Communications Construction Group Limited (CCCG, unrated), a state-owned enterprise wholly owned by the State Council of China.

CCCG was formed in 2005 by combining China Harbour Engineering Company Group (unrated), which was established in 1980, and China Road and Bridge Group (unrated), which was founded in 1979.

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 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 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 rating action, and whose ratings may change as a result of this 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.

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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.

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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
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 first-time A3 rating to China Communications Construction Co Ltd
No Related Data.
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