Hong Kong, August 06, 2019 -- Moody's Investors Service has assigned a first-time Baa3 issuer
rating to Shuifa Group Co., Ltd. (Shuifa).
The outlook is stable.
RATINGS RATIONALE
Shuifa's Baa3 issuer rating combines (1) its b1 baseline credit
assessment (BCA) and (2) a four-notch uplift, based on Moody's
assessment of a high likelihood of support from and high level of dependence
with the Shandong provincial government and ultimately the Government
of China (A1 stable) in times of need and which results in four notches
of uplift.
"Shuifa's BCA reflects its strong market position in water
supply within the province, and the recurring financial support
it receives from the Shandong provincial government," says
Ada Li, a Moody's Vice President and Senior Credit Officer.
"However, its BCA is constrained by its weak financial metrics,
and by the elevated risks associated with its non-water utilities
operations," adds Li.
Moody's assessment of high likelihood of support is based on the
company's (1) strategic importance as a commercial public sector
enterprise, reflecting the company's policy role as the province's
sole platform for water supply and utilities services; and (2) full
ultimate ownership by the Shandong provincial government, with direct
supervision and control. Moody's also considers that there
is a "High" dependence level that reflects that Shuifa and the central
government are exposed to common political and economic event risks.
Moody's expects Shuifa to maintain a high financial leverage with
funds from operations (FFO) to interest coverage and FFO/net debt,
after considering recurring government payments and subsidies and its
acquisition of China Singyes Solar Technologies Holdings Limited (Singyes),
to be around 1.6x to 1.8x and 3%-5%
respectively over the next three years.
Moody's expects capital expenditure program to be at around RMB7-9
billion in 2020 to 2022. With Shuifa's keynote Yellow River
diversion project scheduled for completion in 2019, Shuifa may increase
its investment in non-water supply and utilities businesses,
or businesses outside Shandong province. Such investments will
increase Shuifa's business risks and financial volatilities,
at the same time, these investments are less likely to receive ongoing
financial support from the governments.
Reflecting this challenge, Shuifa recently entered into a subscription
agreement under specific mandate to acquire 66.92% of Singyes,
a defaulted glass curtain and solar company listed in Hong Kong.
While such acquisitions, provide business diversity, they
expose Shuifa to additional business risks, and higher leverage,
depending on the scale and funding structure of the acquisitions.
That said, Moody's expects the water-related business
to remain Shuifa's predominant focus by a large degree, providing
support for the BCA and rating.
In addition, the company is exposed to evolving policies around
water utilities, clean energy and government support for local state-owned
enterprises.
The stable outlook reflects (1) the stable outlook on China's sovereign
rating; and (2) Moody's expectation that Shuifa's BCA
will remain appropriately positioned at b1. The stable outlook
also considers Moody's expectation that Shuifa's strategic
importance to the government will not change materially, despite
the evolving policy environment and Shuifa's diversification into
non-water utilities operations.
The ratings could be upgraded if (1) the likelihood of government support
for Shuifa increases; or (2) Shuifa's standalone credit profile
improves significantly.
Its BCA could improve over time if (1) there are material positive improvements
in the regulatory environment for water utilities and local state-owned
enterprises; (2) Shuifa adopts a less aggressive expansionary strategy;
or (3) it achieves sustained improvements in its financial profile.
Financial metrics indicative of an upgrade of its BCA include adjusted
FFO interest coverage, after considering recurring government payments
and subsidies, exceeding 2.5x on a sustained basis.
The rating could be downgraded if (1) the likelihood of government support
for Shuifa decreases; (2) Shuifa's standalone credit profile
weakens meaningfully; or (3) there is a material weakening in Shuifa's
policy functions.
Shuifa's BCA could be downgraded if (1) there are material negative
changes in the regulatory framework for water utilities and local state-owned
enterprises; (2) Shuifa further engages in risky non-water
utilities commercial operations; (3) it undertakes significant debt-funded
mergers and acquisitions with weaker state-owned enterprises or
privately-owned enterprises; or (4) its financial metrics
weaken for a prolonged period.
Financial metrics indicative of a downgrade of its BCA include adjusted
FFO interest coverage, after considering recurring government payments
and subsidies, falling below 1.25x for a prolonged period.
The methodologies used in this rating were Regulated Water Utilities published
in June 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 2009, Shuifa Group Co. Ltd is the sole financing
and operating entity in Shandong Province for water utilities and water-related
construction and controls key water sources and reservoirs within the
province. The company is also engaged in environmental services,
clean energy, modern agriculture and other businesses.
Shuifa is 100% ultimately owned by the Shandong provincial government,
through a 70% stake held by the Shandong State-owned Assets
Supervision and Advisory Commission (SASAC), a 20% stake
Shandong Guohui Investment Co., Ltd. (Baa2 stable),
and a 10% stake by Shandong Social Security Fund.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
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the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
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for the Regulatory Disclosures for each credit rating action under the
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Policy for Designating Non-Participating Rated Entities.
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.
Ada Li
VP - Senior Credit Officer
Project & Infrastructure Finance
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
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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
