Hong Kong, April 04, 2019 -- Moody's Investors Service has assigned a first-time Baa2 issuer
rating to Shandong Guohui Investment Co., Ltd. (Shandong
Guohui).
The outlook for the ratings is stable.
RATINGS RATIONALE
Shandong Guohui's Baa2 issuer rating primarily combines (1) its ba3 Baseline
Credit Assessment (BCA); and (2) Moody's assessment of a high likelihood
of support from and high level of dependence on the Government of China
(A1 stable), which results in a rating that is four notches above
its BCA.
Moody's high support assessment reflects the following: 1) Shandong
Guohui is a key state-owned capital operation company wholly owned
by the State-owned Assets Supervision and Administration Commission
(SASAC) under the Shandong government; 2) Shandong Guohui owns a
large amount of state-owned assets, most of which are 20%
stakes in 26 high-profile state-owned enterprises (SOEs)
supervised by the Shandong SASAC; 3) Shandong Guohui is designated
by the Shandong government to carry out its plans for the restructuring
of state-owned assets and industrial upgrades against the backdrop
of the transition from old economic drivers to new ones in the province;
furthermore, Shandong Guohui plays an important role in managing
government-led funds and bailout funds; and 4) the track record
of government support in terms of asset and capital injections.
The support assessment also considers the reputational and systematic
risks that may arise if Shandong Guohui were to default, given its
status as the second largest shareholder, in addition to the Shandong
SASAC, in 26 high-profile provincial SOEs. In such
a case, there would be contagion risk for other SOEs affiliated
with the Shandong government, leading to higher borrowing costs
and reduced access to the financial markets.
As such, Moody's believes that the central government is likely
to support efforts by the Shandong government to seek ways to prevent
Shandong Guohui 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 Shandong Guohui and the
central government are exposed to common political and economic event
risks.
Shandong Guohui's BCA of ba3 is underpinned by its sizable investment
portfolio, good industry and asset diversification, and sound
access to domestic funding channels due to its SOE background.
Nevertheless, the BCA is constrained by its high geographic concentration
in Shandong Province, short investment track record, and the
high execution risk from its new investments in emerging industries,
small recurring income from investments as indicated by weak (FFO+interest)/interest
coverage, and moderate credit contagion risk from investees.
Moody's estimates that Shandong Guohui had an adjusted portfolio value
of around RMB75 billion at the end of September 2018. Around 30%
and 24% of its investments in terms of portfolio value were in
the transportation and mining sectors, respectively, mainly
representing 20% equity interests in provincial SOEs, including
Shandong Hi-speed Group Co., Ltd (A3 stable),
Qilu Transportation Development Group, Shandong Energy Group Co.,
Ltd. and Yankuang Group. The rest of Shandong Guohui's investments
are scattered across of a wider range of industries.
Shandong Guohui plans to have major investment needs of around RMB15 billion
in total at the holding company level during 2019-2021.
Its investments will focus on the restructuring of state-owned
assets and emerging industries. Such investments will be largely
funded by debt.
As a result, Moody's estimates Shandong Guohui's debt
level at the holding company level will increase notably by around RMB9-10
billion in 2019 and followed by RMB3-4 billion per annum in 2020-2021.
Accordingly, the company's market value leverage (MVL) ratio
-- measured by net debt/portfolio market value -- will increase
to 25%-35% during 2019-2021 from around 15%
at the end of September 2018.
Shandong Guohui has weak adjusted (FFO+interest)/interest coverage
at the holding company level. Higher debt will increase its interest
expenses in the next 1-2 years, although the dividends from
its investees will likely rise and partially mitigate the impact.
Moody's expects Shandong Guohui's adjusted (FFO+interest)/interest
coverage will rise to around 1.0x in 2019, compared with
an estimated 0.3x in 2018, and return to 0.5x in 2020-2021.
The higher coverage in 2019 is because of an expected one-off large
special dividend from one of its key investees.
Shandong Guohui's credit metrics are weak for its ba3 BCA.
However, this situation is counterbalanced by the expected disposal
income from Shandong Guohui's investments and its sound access to
domestic funding channels.
As the provincial platform for the restructuring and disposal of state-owned
assets, Shandong Guohui holds sizeable disposable investments and
the government will likely continue to inject disposable state-owned
assets into the company. The cash flow from the disposals can support
interest payments and operating costs, despite their volatile nature.
Moreover, despite weak recurring cash flow and sizable maturing
debt, Shandong Guohui's liquidity profile is manageable, due
to Moody's expectation that Shandong Guohui will be able to refinance
its maturing debt in 2019 of around RMB8 billion at the holding company
level (including USD600 million offshore notes issued by Guohui International
Limited and guaranteed by Shandong Guohui). Shandong Guohui has
demonstrated good access to bank credit and the capital markets,
because of its status as a high profile SOE owned by the Shandong government.
The stable outlook reflects (1) the stable outlook on the China sovereign
rating; and (2) Moody's expectation that Shandong Guohui will
implement the investments as it planned and its dividend income from underlying
investees will gradually increase.
Shandong Guohui's rating could be upgraded if (1) the likelihood
of government support increases; or (2) the company's standalone
credit profile improves significantly.
Shandong Guohui's BCA could be upgraded if there is a material increase
in recurring cash flow from its key investees, and a longer and
satisfactory investment track record.
Credit metrics that will lead to an upgrade of its BCA include (1) adjusted
(FFO+ interest)/interest coverage at the holding company level higher
than 1.0x; and (2) a MVL lower than 35% on a sustained
basis.
Shandong Guohui's rating could be downgraded if (1) the likelihood
of government decreases; or (2) the company's standalone credit profile
weakens meaningfully.
Shandong Guohui's BCA could be downgraded to b1 if it embarks on
aggressive debt-funded investments, its liquidity position
or access to funding deteriorates significantly, or contagion risk
from its investees materializes.
Credit metrics that will lead to an downgrade of its BCA include its MVL
surpassing 40% for a prolonged period.
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 2016, Shandong Guohui Investment Co.,
Ltd. is a wholly state-owned capital investment holding
company under the Shandong provincial government. It is an important
platform for the Shandong government for restructuring state-owned
assets and investing in strategic emerging industries. Shandong
Guohui's investment portfolio had an estimated adjusted portfolio value
of around RMB75 billion at the end of September 2018.
The local market analyst for these ratings is Cindy Yang, +86
(106) 319-6570.
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.
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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
