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Rating Action:

Moody's assigns first-time Baa1 rating to Shanghai Construction Group

 The document has been translated in other languages

24 Jun 2015

Hong Kong, June 24, 2015 -- Moody's Investors Service ("Moody's") has assigned a first-time Baa1 issuer rating to Shanghai Construction Group Co., Ltd. (SCG).

Moody's has also assigned a provisional (P)Baa1 rating to the proposed USD senior unsecured notes to be issued by YONGDA Investment Limited and guaranteed by SCG.

The ratings outlook is stable.

The proceeds from the notes will be used for offshore projects and for working capital purposes.

The provisional status of the securities rating will be removed upon the completion of registration of the guarantee of SCG with the China's State Administration of Foreign Exchange.

RATINGS RATIONALE

"SCG's Baa1 rating incorporates its standalone credit strength and a two-notch uplift, based on our expectation that the company will receive strong support from its parent, Shanghai Construction (Group) Corporation in times of stress," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

The high likelihood of extraordinary support from Shanghai Construction (Group) Corporation (SCGC, unrated) is because of SCG's high strategic importance to its parent.

In 2014, SCG accounted for about 96% of its parent's revenue and about 92% of SCGC's total assets. In addition, both companies share the same senior management team.

"SCG's standalone credit strength primarily reflects its large scale, long track record, business diversity and good financial flexibility, as evidenced by its net cash position," adds Lu, who is also the Lead Analyst for SCG.

Moody's points out that SCG has operated for more than 60 years in the construction industry in China. According to Engineering News-Record, in 2014, SCG was the 11th-largest contractor globally by revenue, and the sixth-largest in China by the same measure.

SCG is one of the largest construction companies in China that build high rises. It is also one of the country's largest contractors for the building of major roads, bridges and municipal rail transits. Such diversity alleviates business volatility and stabilizes its margins.

On the other hand, its rating is constrained by its high financial leverage, low profit margins and concentrated operations in Shanghai.

SCG's adjusted debt/EBITDA was high at 5.4x in 2014, because of its investments in build and transfer projects and real estate development. While such a result is weak for its standalone credit strength, the weak result is mitigated by its net cash position, which Moody's expects will be sustained over the next two years.

Moody's expects SCG's adjusted EBITDA margin to register about 4% over the next two years, based on its historical EBITDA margin of about 4% over the last three years. Such a result is weak and does not provide adequate cushions against volatility in costs.

Shanghai — SCG's home region — accounted for 60% of the company's total revenue in 2014. Such a high geographic concentration is partly mitigated by Moody's expectation of higher revenue contributions from regions outside Shanghai over the next three years, given SCG's expanding customer base.

SCG's Baa1 rating also reflects its parent's solid credit profile, because of: (1) SCG's business and financial profile, which largely mirror that of its parent, given that the subsidiary accounts for the vast majority of its parent's revenues and assets; and (2) the high likelihood that SCGC will receive extraordinary support from the Shanghai Municipal People's Government (unrated) in times of need.

Moody's expectation that SCGC will receive extraordinary support from the Shanghai Municipal People's Government is based on: 1) SCGC's status as a state-owned enterprise, wholly owned by the Shanghai Municipal People's Government's State-owned Assets Supervision & Administration Commission (SASAC); and 2) SCGC's significant role both in the construction industry in China, and the infrastructure development and maintenance services in Shanghai.

SCG recently announced that under the guidance of the SASAC of the Shanghai Municipal People's Government, SCGC will transfer 29% of its ownership in SCG to Shanghai Guosheng (Group) Co., Ltd. (Guosheng, unrated), which is in turn wholly owned by the SASAC of the same municipal government. Upon the completion of the transfer, SCGC and Guosheng will own 31.68% and 29.0% of SCG, respectively.

The change in ownership structure, if it materializes, will not materially affect SCG's credit quality, given that SCGC will likely continue to have full control of SCG and that the SASAC of the Shanghai Municipal People's Government will remain the ultimate controlling shareholder of SCG.

Moody's has not notched the issuer rating to reflect subordination risk — despite SCG's status as a holding company — because of the low amount of priority debt relative to the total assets of the group.

The stable rating outlook reflects Moody's expectation that SCG will maintain its market share and EBITDA margins, and remain prudent in its financial management, while expanding its operations outside Shanghai.

Upward rating pressure is limited over the next 12 months, given SCG's high geographic concentration in Shanghai, low profit margins and high financial leverage.

However, upward pressure over the medium term could emerge if SCG: (1) successfully expands its operations outside Shanghai, while minimizing execution risks; (2) improves its profitability and debt leverage through the adoption of prudent investment strategies.

Credit metrics indicating upward rating pressure include an adjusted debt/EBITDA below 4x, an adjusted EBITDA margin in excess of 5.5%-6.0%, and the maintenance of a net cash position on a sustained basis.

On the other hand, SCG's rating will be downgraded if: (1) it aggressively invests in build and transfer projects and real estate development, resulting in a considerable deterioration in its financial profile; (2) it experiences a substantial decline in its new contracts wins; (3) it incurs large cost overruns and delays in its projects; and (4) there is evidence of weakened support from SCGC, or if SCGC's credit profile weakens significantly, or if the parent company ceases to own a controlling stake in SCG.

Credit metrics indicating downward rating pressure include an adjusted debt/EBITDA in excess of 6.0x-6.5x, an adjusted EBITDA margin below 3% and a migration to a net debt position a sustained basis.

The principal methodology used in these ratings was Construction Industry published in November 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Shanghai, Shanghai Construction Group Co., Ltd. provides construction, contracting, design and engineering services, as well as real estate development services, and manufactures concrete products.

It is 60.68%-owned by Shanghai Construction (Group) Corporation, a state-owned enterprise which is wholly owned by the State-owned Assets Supervision & Administration Commission of the Shanghai Municipal People's Government.

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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

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
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 Baa1 rating to Shanghai Construction Group
No Related Data.
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