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Rating Action:

Moody's assigns first-time A3 rating to Guangzhou City Construction Investment Group

 The document has been translated in other languages

26 Jan 2018

Hong Kong, January 26, 2018 -- Moody's Investors Service, ("Moody's") has assigned a first-time A3 issuer rating to Guangzhou City Construction Investment Group Co., Ltd.

Moody's has also assigned a A3 rating to the proposed USD senior unsecured notes to be issued by Smooth Tone (HK) Limited and guaranteed by Guangzhou City Construction.

The ratings outlook is stable.

The proceeds from the notes will be used for investment in big data business, aircraft leasing and other general corporate purposes.

RATINGS RATIONALE

Guangzhou City Construction's A3 rating incorporates its baseline credit assessment (BCA) of ba2 and a five-notch uplift, reflecting Moody's assessment of a very high level of support from the Guangzhou city government to the company in times of need.

Given Guangzhou City Construction's strategic significance to Guangzhou city — which is the capital city of Guangdong Province and the economic center of the Pearl River Delta region — Moody's also expects that the company will receive support from the Guangdong provincial government, if needed.

Specifically, Moody's expectation of a very high level of government support for the company in times of need reflects the following factors:

• The company is wholly owned by the Guangzhou city government and is one of five quasi-welfare state-owned enterprises (quasi-welfare SOEs) in the city that have mandates in relation to non-profit public infrastructure projects in designated sectors. The company is the only authorized SOE responsible for investment, financing, construction and management for urban infrastructure projects in the city. The company was the second largest quasi-welfare SOE in the city by asset size.

• The company and Guangzhou Metro Group Co., Ltd. (A3 stable) — which is the largest quasi-welfare SOE in Guangzhou — have received the largest fund allocations from the city government's budgets over the past several years. Because the company worked closely with government bureaus in planning and executing public projects, much of the subsidies and grants related to current and completed projects is outlined in relevant government plans until 2025.

• The close integration with and solid track record in relation to the company's co-ordination with the Finance Bureau and other bureaus of the city on its strategic planning, resource allocation and project executions. The city government also oversees the appointment of senior management and key personnel for the company.

• Guangzhou City Construction demonstrates its ability and experience in coordinating and working with various government bureaus in Guangzhou city in executing and managing large public projects that can meet the city development plan's schedule, as well as quality and cost requirements.

• At the end of June 2017, Guangzhou City Construction's onshore outstanding bonds and bank loans totaled RMB11.7 billion and RMB39.5 billion respectively. Owing to the close relationship between Guangzhou City Construction and the Guangzhou government, if Guangzhou City Construction fails to receive government support and runs into financial distress, there would likely be material disruptions to the regional economy and contagion risk for other SOEs affiliated with the Guangzhou city government and Guangdong provincial government; leading to higher borrowing costs and reduced access to the financial markets.

• Guangzhou is a prominent first tier city in China, on par with Beijing, Shanghai and Shenzhen. A default by Guangzhou City Construction would therefore likely adversely impact the reputation of the Guangzhou city government and the Guangdong provincial government.

In view of its transforming business profile and strategic policy functions — which are more at a regional rather than national level — Moody's categorizes the primary activities of Guangzhou City Construction under the "commercial public sector".

Guangzhou City Construction's A3 rating is also underpinned by its home city's robust economy and resources available to support the company.

The GDP of Guangzhou city totaled RMB1.96 trillion in 2016 and ranked the third highest in China after Shanghai and Beijing. The city is the provincial capital of Guangdong Province, which in turn reported the highest GDP of all provinces in China during 2016, totaling RMB7.95 trillion for the same year.

In terms of per capita GDP, Guangzhou city also ranks among the highest in China. Its per capita GDP in 2016 totaled RMB145,254, a level which is well above the national per capita GDP of RMB53,980 and comparable to the other top tier cities of Beijing (RMB114,653), Shanghai (RMB113,615) and Shenzhen (RMB167,411).

Guangdong's general budgetary revenue totaled RMB1.04 trillion in 2016 and ranked first among all Chinese provinces, and Guangzhou's general budgetary revenue for the same year totaled RMB139.4 billion, ranking second among all provincial capitals in the country.

The company's BCA of ba2 reflects its weak profitability and regular annual subsidies, grants and capital injections, which allow it to gradually reduce its debt.

Because the bulk of Guangzhou City Construction's projects are not-for-profit, the company relies heavily on subsidies, grants and capital injections from the city government. This operational support has helped it manage its funding needs.

Between 2012 and 2016, the company received at least RMB2 billion in subsidies from the government and on average around RMB8 billion in grants and capital injections every year. By contrast, its reported revenue — which, while growing — totaled at a very low level of RMB1.5 billion in 2016.

Taking into account the planned subsidies, grants and capital injections from the city government, Moody's projects that the company will receive injected funds of RMB6.1 billion in 2017, RMB10.9 billion in 2018, and RMB7.1 billion in 2019.

Such support will allow the company to cover its cash interest expenses of around RMB2.2 -- RMB2.4 billion per annum and lower its projected total debt to RMB43.3 billion at end-2019 from RMB52.8 billion at end-2016.

Guangzhou City Construction's leverage is driven moderately by debt used to support policy projects, partially offset by strong government subsidies, grants and cash equity injections.

Moody's expects the company's adjusted funds from operations (FFO)/interest ratio to be around 4.0x-4.5x over the next two years, largely unchanged from 4.4x in 2016. In addition, its adjusted debt/book capitalization will improve to about 40% over the next two years from 51.3% in 2016. These levels of leverage well position the company's BCA at the ba2 level.

Guangzhou City Construction's stable rating outlook reflects:

(1) Moody's assessment that the company's BCA will remain appropriate for its current rating level over the next 12-18 months;

(2) Guangzhou City Construction's key public policy role and the Guangzhou government's ability to support the company will remain unchanged, as seen by the stable outlook on China's sovereign rating; and

(3) The fact that the company is less affected by prevailing policy changes in relation to local government financing vehicles (LGFVs), because of progress in its business transformation and its close working relationship with the Guangzhou government.

Upward rating pressure is limited, given the company's weak profitability — and despite its ongoing business transformation — and the evolving policies directed at LGFVs.

However, over time, upward pressure could emerge if: (1) Guangzhou City Construction's BCA improves significantly; and (2) at the same time, the credit quality of the Guangzhou government and Guangdong government strengthen as indicated by an upgrade of China's sovereign rating.

On the other hand, the rating could be downgraded if:

(1) There are signs of weakening government support for the company, or if the city government ceases to own a controlling stake in Guangzhou City Construction;

(2) The city government's ability to provide support to the company weakens significantly as indicated by a sovereign rating downgrade;

(3) The company expands aggressively outside its core business, with an increasing level of commercial operations, which would in turn weaken its strategic linkage to the government;

(4) Guangzhou City Construction's financial profile weakens materially, with adjusted FFO/interest coverage below 2.5x and adjusted debt/capitalization above 55% on a sustained basis; or

(5) The policy framework for LGFVs evolves in such a way as to weaken the likelihood of government support for the company.

The methodologies used in these ratings were Business and Consumer Service Industry published in October 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.

Established in 2008, Guangzhou City Construction Investment Group Co., Ltd is 100% directly owned by the People's Government of Guangzhou Municipality and supervised by the State-owned Assets Supervision and Administration Commission of the municipal government.

The company is the urban infrastructure development platform in Guangzhou responsible for the investment in, as well as financing, operation and management of non-profit-making public projects, including roads, bridges, tunnels, urban environmental improvement and urban afforestation.

It was also instrumental in completing the infrastructure projects and stadium for the 2010 Asian Games hosted by Guangzhou city.

The company received government grants, subsidies and equity injections totaling RMB9 billion in 2016 and reported total assets of RMB114.7 billion at 31 December 2016.

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.

Chenyi Lu
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
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

No Related Data.
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