Hong Kong, October 11, 2018 -- Moody's Investors Service has assigned a first-time Baa3
issuer rating to Chengdu High-Tech Investment Group Co.
Ltd. (CDHT).
The rating outlook is stable.
RATINGS RATIONALE
CDHT's Baa3 rating primarily combines (1) its ba3 baseline credit
assessment (BCA); and (2) Moody's assessment of the "Strong"
likelihood of support from and "High" level of dependence
on the Government of China (A1 stable) when in need, which results
in a rating that is three notches above its BCA.
Moody's support assessment reflects CDHT's leading role in investing,
developing and operating the Chengdu High-tech Development Zone,
its ultimate 100% ownership by the Chengdu government, and
a track record of receiving government support, including refinancing
of around RMB3.5 billion (or 34% of the company's total
debt in 2014) through government debt swaps as of the end of 2017.
CDHT is mainly mandated by the Chengdu government to develop and operate
the Chengdu High-tech Development Zone, including infrastructure
construction, the development of so-called talent apartment,
as well as the provision of industrial and office properties --
at below market rental rates if necessary -- for companies
moving into the high-tech development zone.
The Chengdu High-tech Development Zone is ranked among the top
10 state-level high-tech development zones in China,
and is economically important to Chengdu City and Sichuan Province.
The support assessment also considers the reputational and contagion risks
that may arise if it were to default, given CDHT's status as the
largest government-owned entity in the Chengdu High-tech
Development Zone, which is of strategic importance to the province.
As such, Moody's believes the central government would support
efforts by the Chengdu government and the Sichuan government to prevent
CDHT from defaulting and thus avoid disruption to the domestic financial
market. This support can take various forms, including government
subsidies, capital or asset injections, as well as loans from
policy and state-owned banks.
CDHT's BCA is driven by its diversified revenue sources and product mix
to mitigate the volatility of industrial property development, by
its limited business risk due to its monopoly market position in the high-tech
development zone, and by its good access to domestic funding.
These credit strengths are partly offset by the company's elevated debt
leverage in 2018-2019 due to its large capital spending needs for
the development of the talent apartments.
Sales of industrial and office properties in the high-tech development
zone form the biggest revenue and profit contributor for CDHT, accounting
for around 45% of the company's total revenue and gross profits
in 2017.
In addition, recurring rental income from industrial and office
properties — which accounted for approximately 10%-15%
of the company's total revenue — led to good coverage of recurring
rental income to total adjusted interest expense of 0.6x-0.8x
in 2015-2017.
This ratio will likely decline to 0.3x-0.4x in the
next 12-18 months as the company will sell more self-owned
industrial properties to accelerate cash flow turnover. Nevertheless,
this recurring rental income partly mitigates the risk arising from potential
volatility in its industrial property development business.
When compared to industrial peers operating in a commercially competitive
environment, CDHT faces relatively low business risk, due
to its monopoly market position in the Chengdu High-tech Development
Zone, as well as its role in implementing the government's policy
mandate.
CDHT has also demonstrated its good access to diversified sources of domestic
funding, as evidenced by its multiple onshore banking relationships
and track record of tapping the onshore debt capital markets. Its
45.4%-owned subsidiary -- Chengdu High-tech
Development Co., Ltd. -- is also listed on the
Shanghai Stock Exchange, and can provide alternative funding access
to the equity capital markets, if needed.
However, CDHT's standalone credit profile is constrained by
an expected rise in its debt leverage in the next 12-18 months.
Moody's expects that CDHT's adjusted debt level will significantly
increase to around RMB35 billion in 2018 from RMB21 billion in 2017 due
to the commencement of the talent apartment project from 2017 --
a policy-driven residential property program whereby apartments
are offered at attractive selling and rental rates to certain groups of
the population in order to attract talent.
CDHT is responsible for the development of nine talent apartment projects
in the development zone over the next 2-3 years, with a total
investment of around RMB29 billion. As a result, Moody's
expects the company's adjusted debt/book capitalization ratio will
increase to 67%-68% in 2018-2019 from 57%
in 2017.
Moody's expects the talent apartment project will further broaden
the company's product mix and start bringing in revenue and cash
flow from 2019. Moody's expects the company will use the
additional cash flow to deleverage, with adjusted debt/book capitalization
ratio and adjusted (FFO from non-government transactions +
government cash payments + interest)/interest ratio moderately improving
to 63% and 2.1x by 2020, upon the completion of most
construction works. Such key credit metrics support its BCA of
ba3.
The stable outlook reflects (1) the stable outlook on China's sovereign
rating; and (2) the consideration that CDHT's BCA is appropriately
positioned at the current level.
The ratings could be upgraded if (1) the likelihood of support for CDHT
increases, and/or (2) CDHT's standalone credit profile improves
significantly.
CDHT's BCA could be raised if the company's business or financial profile
improves. Credit metrics indicative of upward pressure on its BCA
include adjusted (FFO from non-government transactions + government
cash payments + interest)/interest exceeding 3.0x on a sustained
basis.
The ratings could be downgraded if (1) the likelihood of support for CDHT
decreases, and/or (2) CDHT's standalone credit profile weakens
meaningfully.
CDHT's BCA could be lowered in case of a material deterioration in its
business or financial profiles. Credit metrics indicative of a
potential downgrade of the BCA include adjusted (FFO from non-government
transactions + government cash payments + interest)/interest
below 1.8x-2.0x on a sustained basis.
The methodologies used in these ratings were Homebuilding And Property
Development Industry published in January 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.
Chengdu High-Tech Investment Group Co. Ltd. is 100%
owned by the Chengdu High-tech Zone Administrative Committee under
the Chengdu government. The company is mandated by the Chengdu
government to develop and operate the Chengdu High-tech Development
Zone, mainly including infrastructure construction, the development
of talent apartments, as well as the provision of industrial and
office properties for companies moving into the development zone.
The company also engages in some commercial activities, including
construction, commercial property development, merchandising,
financial services and industrial investments.
The local market analyst for this rating is Cindy Yang, +86
(10) 63196570.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
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or category/class of debt or pursuant to a program for which the ratings
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this announcement provides certain regulatory disclosures in relation
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disclosures in relation to the provisional rating assigned, and
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the final issuance of the debt, in each case where the transaction
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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.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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Moody's Investors Service Hong Kong Ltd.
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