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Rating Action:

Moody's assigns first-time Baa1 rating to Guangzhou Development District Financial Holdings Group

 The document has been translated in other languages

03 Jul 2019

Hong Kong, July 03, 2019 -- Moody's Investors Service has assigned a first-time Baa1 issuer rating to Guangzhou Development District Financial Holdings Group Co., Ltd. (GDDF).

At the same time, Moody's has assigned a Baa1 senior unsecured rating to the proposed bonds to be issued by GET International Investment Holdings Limited and unconditionally and irrevocably guaranteed by GDDF.

The ratings outlook is stable.

The proceeds from the notes will be used to refinance existing debt and for general corporate purposes.

RATINGS RATIONALE

GDDF' Baa1 rating combines (1) its ba1 baseline credit assessment (BCA); and (2) a three-notch uplift to reflect Moody's assessment of a high likelihood of support from and high level of dependence on the Government of China (A1 stable) in times of need.

Moody's high support assessment reflects GDDF's important status as a key investment platform for and full ownership by the Guangzhou Development District Administrative Committee (GDDAC), under the Guangzhou government.

The support assessment also considers the reputational and systematic risks that may arise if GDDF were to default, given the company's status as the largest state-owned enterprise (SOE) under the district government to manage the majority of state-owned assets in the Guangzhou Development District (GDD) and its role in undertaking important policy mandates, including investment in infrastructure projects and strategic industries, and the provision of essential services such as heat, power, and water supplies and treatment in the district.

Specifically, the high support assessment takes into account:

1) GDDF's significant role in investing in strategic and innovative industries in the district, such as hi-tech and healthcare, which have strong growth momentum and support Guangzhou's industrial upgrades;

2) Its strategic importance in the development of the GDD -- the industrial center of Guangzhou and the second largest national-level economic development zone, which supports Guangzhou's economic growth and the development of the Guangdong-Hong Kong- Macao Greater Bay Area as a high-level national strategy;

3) The track record of strong government support, including government subsidies and capital injections.

Therefore, Moody's believes that the central government is likely to support the efforts by the GDDAC and Guangzhou government to seek ways to prevent GDDF from defaulting and thus avoid the risk of disruption to the domestic financial markets that might occur otherwise. This support can take various forms, including government subsidies, capital or asset injections, and loans from policy as well as state-owned banks.

The high dependence level reflects the fact that GDDF and the central government are exposed to common political and economic event risks.

GDDF's BCA of ba1 is underpinned by (1) its growing investment portfolio with a high level of business and asset diversification; (2) recurring cash flows from property rental, interest and dividend income; (3) large cash payments from the GDDAC; and (4) good liquidity and funding access to support its investment growth.

GDDF conducts its investment activities through its holding company and six intermediate holding companies. At the end of 2018, Moody's estimates that its total adjusted investment portfolio value was around RMB27 billion, and expects the portfolio size to grow further towards RMB50 billion over the next two to three years.

The company's portfolio is diversified across various sectors that are aligned with the government's policies and economic focus, such as high-tech and artificial intelligence, bio-pharma and healthcare, investment properties, financial services and public services. Its top three investees, namely the joint ventures with LG Display Co., Ltd., Lianxun Securities Co., Ltd., and GDD Industrial Funds, accounted for less than 30% of its portfolio value in 2018.

In addition, over 50% of its investment portfolio is comprised of investment properties, loans and fund investments, which generate stable and recurring cash flows to cover its interest and operating expenses.

However, the company's BCA is constrained by: (1) its fast growing investment portfolio, which will raise its leverage; (2) its high geographic concentration and limited information transparency, as a large number of its investees are unlisted; and (3) the moderate credit contagion and execution risks associated with its major investees.

Moody's expects adjusted net debt at the combined holding company level (GDDF and the six intermediate holding companies) will grow by RMB10 billion in the next 2-3 years, mainly to fund an estimated RMB20-25 billion in investments, after considering budgeted government cash payments, its ample cash balance and sales of investment properties.

Accordingly, Moody's expects market value leverage (MVL) ratio at the combined holding company level -- as measured by adjusted net debt/portfolio market value -- will increase moderately to 30%-35% by the end of 2021 from around 20% at the end of 2018. At the same time, interest coverage -- as measured by (funds from operations (FFO) + interest)/interest -- at the combined holding company level will decrease to 1.3x-1.5x from around 3.0x during the same period. These credit metrics continue to support GDDF's ba1 BCA.

The company's investment portfolio is highly concentrated in the GDD area, leaving it exposed to regional economic conditions and ongoing policy changes. The majority of its investments comprise minority stakes in private investees, which are difficult to monitor and for which it is hard to estimate the market value.

In addition, GDDF is exposed to credit contagion risk associated with its major investees, as well as to execution risks and potential volatility in dividend payments it receives, given that some of its investees are at an early stage of development.

However, these risks are partially mitigated by GDDF's diversified businesses and investees, and the district government's financial support and close monitoring.

GDDF has a strong liquidity profile at the combined holding company level, supported by its ample cash holdings and well-managed debt maturity profile. At the end of 2018, the combined holding company had around RMB6 billion in cash and cash-like bank wealth management products, which were sufficient to cover its debt maturing over the next two years.

GDDF also has good access to domestic funding, given its status as the largest SOE in the district and its high importance to the government. Its strategic importance will continue to support the company's access to funding as it seeks to grow its investment scale.

In terms of environmental, social and governance (ESG) factors, the Baa1 ratings also factor in (1) the company's modest risk exposure to environmental risk and changing demographics and consumer preferences, mitigated by its diversified investment portfolio and the likelihood of strong government support; (2) its full ownership, supervision and close monitoring by the government, and (3) its sound record of executing government mandates, risk control and prevention mechanisms.

The stable outlook reflects (1) the stable outlook on China's sovereign rating; and (2) Moody's expectation that GDDF's BCA will remain appropriately positioned at the current level.

The rating could be upgraded if (1) the likelihood of support for GDDF increases; or (2) GDDF's BCA improves.

GDDF' BCA could be upgraded if it (1) materially improves its investment portfolio, for example by enlarging its portfolio, establishing a sound investment track record, and if the credit quality of its key investees improves; (2) maintains a solid liquidity profile and financial metrics; and (3) strengthens its geographic diversification and information transparency.

Credit metrics that will lead to an upgrade of its BCA include: (1) FFO/interest coverage at the combined holding company level higher than 2.5x; and (2) a MVL lower than 25% on a sustained basis.

The rating could be downgraded if (1) the likelihood of support for GDDF decreases; or (2) GDDF's BCA weakens.

GDDF's BCA could be downgraded if it pursues aggressive expansion or fails to execute its investment plans, such that its MVL rises further, its credit quality weakens, or contagion risk from its investees materializes.

Credit metrics that will lead to a downgrade of its BCA include: (1) FFO/interest coverage at the combined holding company level lower than 1.0x; and (2) a MVL above 40% on a sustained basis.

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 1998, Guangzhou Development District Financial Holdings Group Co., Ltd. (GDDF) is an investment holding company that is 100% owned by the Guangzhou Development District Administrative Committee (GDDAC), under the Guangzhou government.

GDDF is mandated by the GDDAC to invest in strategic industries, including advanced manufacturing, hi-tech and artificial intelligence, bio-pharmaceutical and healthcare, and financial services, to support the regional economic development. The company also invests in infrastructure projects, such as industrial and office buildings, and provides public services in the district, such as heat, power, water supplies and treatment.

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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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