Hong Kong, September 28, 2017 -- Moody's Investors Service has assigned a first-time Baa3
issuer rating to Yiwu State-owned Capital Operation Co.,
Ltd. (YWSCOC).
The rating outlook is stable.
RATINGS RATIONALE
YWSCOC's Baa3 issuer rating primarily combines: (1) its ba3 baseline
credit assessment (BCA); and (2) Moody's assessment of a high
likelihood that the company will receive extraordinary support from the
Yiwu City Government (Yiwu Government) in times of need, which provides
a three-notch uplift to its rating.
This support assessment reflects YWSCOC's dominant role in the city's
development, with these projects being partly commercially viable,
but also linked to the public policy goals of the Yiwu Government —
prompting Moody's to categorize the company in the "Commercial
Public Sector" — and the company's 100% ownership
by the Yiwu Government.
In addition, the high level of government support for YWSCOC reflects
the following factors:
1) The company consolidates the major state-owned enterprises (SOEs)
under the Yiwu Government in implementing the city's developments
plans. It has a monopoly position in various public services,
including the construction of major urban infrastructure, the storage
of strategic grain reserves, the development of shantytown renovation
projects, as well as the provision of public transportation and
water services;
2) Close supervision by the Yiwu Government; in particular,
its executive directors — except one employee director who is elected
by the labor union — are appointed by the government, and
so are all senior management;
3) It continues to receive large amounts of government subsidies and capital
injections;
4) Moody's estimates that more than 60% of its debt have
been raised for public welfare projects and commercial public projects
which are supported by the annual budgets of the Yiwu Government;
and
5) The robust fiscal strength and local economy of Yiwu city — indicating
a strong ability to provide support — as well as the status of YWSCOC
as the largest SOE in the city and one of the largest domestic bond issuing
SOEs in Zhejiang Province; implying a likelihood that the company
would receive support from the Zhejiang Provincial Government, in
times of need.
"Although the Yiwu Government is a county-level government,
it demonstrates a similar level of authority as prefecture-level
governments in terms of social and economic development, and administrative
and fiscal management," says Franco Leung, a Moody's
Vice President and Senior Credit Officer, and also the International
Lead Analyst for YWSCOC.
Yiwu city is located in the central area of Zhejiang Province.
The city is well known nationally and internationally for its small commodity
trading centers, most of which are owned and managed by YWSCOC.
Small commodities are traded by foreign and local merchants, and
include kitchenware, outfits and accessories.
Yiwu's railway is currently the only railway port for Zhejiang Province.
And, Yiwu city is an important hub in the implementation of China's
Belt and Road initiative, as well as for small commodities distribution
and foreign trade-related activities.
Yiwu city's export volumes accounted for 12.5% of
total export volumes in Zhejiang Province in 2016, and most of this
total came from the small commodity trading centers owned and managed
by YWSCOC.
YWSCOC's unique business model and its importance to Yiwu city help
mitigate the effects of the evolutionary nature of the funding and policy
risks associated with local government financing vehicles.
"YWSCOC's ba3 BCA is driven by its diversified business profile,
which consolidates the majority of Yiwu city's state-owned
operating assets; the stable recurring rental income from its widely
and internationally recognized small commodity trading centers; and
its strong access to domestic funding," says Cindy Yang,
a Moody's Assistant Vice President and Analyst, and also the Local
Market Analyst for YWSCOC.
YWSCOC's diversified business profile includes the operation of
small commodity trading centers, urban infrastructure construction,
property development, shantytown renovation project development,
warehouse & logistics, water services, and public transportation.
These businesses exhibit different industry cycles, thereby lowering
the company's exposure to the operating environment of any particular
sector.
The stable rental income generated from the small commodity trading centers
— which accounted for approximately 26% of the company's
total revenue — led to strong coverage of recurring rental income
to total interest expenses (including capitalized interest) of 2.2x
in 2016.
While the projected ratio will gradually fall to around 1.0x over
the next 1-2 years — because of the higher interest expenses
arising from the additional debt required to fund new projects —
such coverage is strong among Ba-rated Chinese corporates.
On the other hand, YWSCOC's BCA is constrained by its high
debt leverage, because of its sizable investment plan for infrastructure
construction and shantytown renovation projects over the next 2-3
years.
Moody's estimates that the majority of these investments will be
debt funded. As a result, YWSCOC's adjusted debt/capitalization
should rise to 65%-70% over the next 2-3 years
versus 60% in 2016.
Nevertheless, YWSCOC's high financial risk is partly mitigated
by the fact that the majority of the debt associated with its public welfare
projects and commercial public projects is supported by: (1) periodic
cash flow from the Yiwu Government in the form of capital injections,
and the buyback of agreed infrastructure projects and shantytown renovation
projects; (2) the supply of recurring government subsidies;
and (3) the presence of its debt swap program amounting to RMB2.6
billion, and representing around 7% of its total reported
debt at 31 December 2016.
YWSCOC's liquidity profile is weak. Its cash balance of RMB4.8
billion was insufficient to cover the RMB11.8 billion in short-term
debt outstanding at end-March 2017. Nonetheless, the
company has good access to domestic funding channels, including
bank loans and the public bond market, given its strong direct linkage
to the Yiwu Government and indirectly with the Zhejiang Provincial Government.
The stable rating outlook incorporates Moody's expectations 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 Yiwu Government and the Yiwu Government's
ability to provide support will remain intact.
Moody's will upgrade YWSCOC's rating if the company's
BCA improves, without any material changes in the support assessment.
Moody's will raise the company's BCA if the company can improve
its financial profile by increasing earnings and reducing debt.
Credit metrics that will indicate upward pressure on the BCA include:
(1) funds from operations (FFO) interest coverage — after government
grants and subsidies — exceeding 3.0x on a sustained basis;
and (2) adjusted debt/capitalization below 50% on a sustained basis.
Moody's would also upgrade the rating — without a corresponding
improvement in the BCA — if the company's importance to the
Yiwu Government strengthens or the Yiwu Government's ability to
support YWSCOC improves.
Moody's would downgrade the rating if YWSCOC'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) FFO interest coverage below 1.0x-1.2x; and
(2) adjusted debt/capitalization above 70%-75% on
a sustained basis.
A downgrade of YWSCOC's rating — without a lowering of its
BCA — could also be triggered by a reduction in YWSCOC's importance
to the Yiwu Government, or a weakening of the Yiwu 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.
Yiwu State-owned Capital Operation Co., Ltd.
is 100%-owned and directly supervised by the State-Owned
Assets Supervision and Administration Commission of the Yiwu City Government
(Yiwu SASAC).
As the sole platform of the Yiwu SASAC, the company consolidates
the Yiwu Government's major state-owned operational assets,
including the operation of its trading centers; urban infrastructure
construction; shantytown renovation projects development; warehouse
& logistics; water services; and public transportation.
At end-2016, the company's registered capital totaled
RMB1.68 billion, with total assets of RMB98.4 billion.
The Local Market analyst for this rating 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
