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Rating Action:

Moody's assigns first-time Baa2 to Hubei Science & Technology Investment Group

 The document has been translated in other languages

01 Feb 2018

Hong Kong, February 01, 2018 -- Moody's Investors Service has assigned a first-time Baa2 issuer rating to Hubei Science & Technology Investment Group Co., Ltd. (HSTIG).

Moody's has also assigned a Baa2 rating to the proposed USD senior unsecured notes to be issued by Hubei Science & Technology Investment Group (Hong Kong) Company Limited and guaranteed by HSTIG.

The ratings outlook is stable.

The proceeds from the notes will be used for general corporate purposes.

RATINGS RATIONALE

HSTIG's Baa2 issuer rating primarily combines: (1) its ba3 baseline credit assessment (BCA); and (2) a four-notch uplift based on Moody's assessment of a high likelihood that the company will receive extraordinary support from the Wuhan Municipal Government (Wuhan Government) in times of need.

Moody's support assessment reflects HSTIG's important role in the development of the East Lake High-tech Zone, and the company's close linkage with the Wuhan Government through the Wuhan East Lake High-tech Development Zone Administrative Committee (the Committee).

The Committee is a government agency with a mandate to develop and manage the East Lake High-tech Zone for the Hubei Provincial Government (Hubei Government). The Hubei Government entrusts the Wuhan Government to manage the Committee.

The success of the East Lake High-tech Zone has significant strategic importance to Wuhan and Hubei. Labeled as China's "Optics Valley", the East Lake High-tech Zone is the largest producer of fiber optic cables and photoelectric devices and has the largest laser industrial base in China.

HSTIG is mainly responsible for the construction of infrastructure, industrial park development and investment in strategic industries in the East Lake High-tech Zone. Some of these projects are partly commercially viable, but are also linked to the public policy goals of developing this area into a nationally important high-tech zone.

This situation has prompted Moody's to categorize the company in the "Commercial Public Sector".

Moody's believes that HSTIG will receive a high level of support from the Wuhan Government and indirectly from the Hubei Government through the Committee, in times of need, based on the following considerations:

• HSTIG's status as one of the top 10 state-owned-enterprises in Wuhan and Hubei in terms of total assets in Wuhan and Hubei;

• HSTIG's close financial linkage with the government because: 1) around RMB14 billion (representing 30% of the company's total debt) were classified as the government's direct liabilities at the end of 2014 and have been almost fully refinanced through government debt swaps during the past three years, and 2) the company has received ongoing subsidies, government buybacks and cash injections from the Committee;

• HSTIG's close integration and solid track record of coordination with the Committee and other government bureaus in terms of strategic planning, resource allocation and project executions; and

• The reputation risk to the Wuhan Government and the Hubei Government should the company default.

The BCA of ba3 reflects HSTIG's: 1) large asset base; 2) strong liquidity and access to domestic funding; and 3) high leverage levels due to its sizeable capital expenditure (capex) related to infrastructure construction and investment in strategic industries mandated by the Committee.

HSTIG's leverage levels are high, because it needs to fund the infrastructure projects and invest in strategic industries mainly with debt. Nevertheless, this risk is partially mitigated by the fact that the majority of its debt is associated with government mandates and will likely be repaid by government buybacks and capital injections.

Between 2014 and 2016, the government bought back RMB9.6 billion of infrastructure projects from HSTIG and injected RMB8.9 billion of capital into the company.

Because government buybacks and capital injections are usually received after HSTIG undertakes the relevant investments and infrastructure projects, the company needs to pre-fund the investments and infrastructure construction by raising debt for an extended period of time.

Moody's estimates that HSTIG's investments will total around RMB13 billion and RMB10 billion in 2017 and 2018, respectively, with the majority debt funded.

As a result, Moody's expects the company's leverage to remain high over the next 12-18 months.

Projected adjusted debt/capitalization will register around 65%-70% in the next 12-18 months and adjusted funds from operations (FFO)/interest coverage — after government buybacks and capital injections — will fall slightly to around 1.7x-1.8x over the same period from 1.9x-2.0x observed in 2015-2016.

HSTIG's liquidity profile is strong. It had a cash balance of RMB23.4 billion at 30 September 2017, which can fully cover its short-term debt of around RMB9 billion and projected capex of RMB10-RMB11 billion over the next 12 months. HSTIG also held RMB2.8 billion in marketable securities at the end of September 2017, which can provided an alternative source of liquidity, if needed.

In addition, as a large state-owned enterprise in Wuhan and Hubei, HSTIG has good access to domestic bank facilities and the debt capital markets. At 30 June 2017, it had undrawn credit facilities of around RMB36 billion from domestic banks.

The stable rating outlook incorporates Moody's expectation that over the next 12-18 months: (1) the company's credit metrics will be maintained at levels that are appropriate for its ba3 BCA; and (2) its importance to the Wuhan Government, and the Wuhan Government's ability to provide support, will remain intact.

Moody's will upgrade the rating if the company's BCA improves, without any material changes in the support assessment.

Moody's will raise the company's BCA if HSTIG can improve its financial profile by strengthening cash flow and reducing debt. Credit metrics that will indicate upward pressure on the BCA include: (1) adjusted FFO/interest coverage — after government buybacks and capital injections — exceeding 3.0x; and (2) adjusted debt/capitalization falling below 50% on a sustained basis.

Moody's will downgrade the rating if the company's BCA is lowered because of a material deterioration in its business or financial profile, without any material changes in the support assessment.

Credit metrics indicative of downward pressure on its BCA include: (1) adjusted FFO/interest coverage falling below 1.2x; and (2) adjusted debt/capitalization trending above 70%-75% on a sustained basis.

A downgrade of HSTIG's rating — without a lowering of its BCA — could also be triggered by a reduction in the company's importance to the Wuhan Government, or a material weakening of the Wuhan Government's ability to support 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.

Hubei Science Technology Investment Group Co., Ltd. is 81.55%-owned by the Wuhan East Lake High-tech Development Zone Administrative Committee (the Committee), 4.89%-owned by China Development Bank (Beijing) New Urbanization Development Fund, 9.78%-owned by Huaneng Guicheng Trust Co. Ltd. and 3.78%-owned by Minmetals International Trust Co. Ltd.

The shares owned by the latter three shareholders will be repurchased by the Committee and other entities owned by the Committee during 2019-2020.

The company's primary activities comprise public infrastructure construction, industrial park development, investment in strategic industries and very limited commercial activities, including the sale and maintenance of cars, construction business and production and sale of electronics. Its assets totaled RMB118.8 billion at 30 September 2017.

The Local Market analyst for these ratings is Cindy Yang, + 86 (10) 6319-6570.

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.

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.

Franco Leung
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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