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
