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
