Hong Kong, August 20, 2021 -- Moody's Investors Service has changed to positive from stable,
the outlook on Hubei Science & Technology Investment Group (HSTIG)'s
Baa3 issuer rating.
At the same time, Moody's has affirmed the Baa3 issuer rating.
"The change in outlook to positive reflects our expectation that
the government-led Optical Valley Science and Technology Corridor
development will strengthen HSTIG's strategic importance to the
Wuhan government," says Chenyi Lu, a Moody's Vice
President and Senior Credit Officer. "It also reflects the
company's continuing improvement in access to funding, debt
management and contingent risk exposures."
RATINGS RATIONALE
In February 2021, Hubei Provincial Government announced the Notice
on the strategic development of the Optical Valley Technology Innovation
Corridor (2021-2035). The corridor will lead the urbanization
development of Wuhan's metropolitan area and the high-quality
development of Hubei province. The Wuhan East Lake High Tech Development
Zone, which is developed by HSTIG, will be the core area of
the Optical Valley Corridor.
Moody's expects HSTIG's strategic importance to the Wuhan
government to increase considering its expanded role to execute Hubei
Province's Optical Valley Corridor strategy and likely increase
in government cash payments to support its capital spending in public
policy-related projects and strategically important industrial
investments .
HSTIG's access to funding has been improving over the past 12 months
and its shadow banking exposures have been reducing. Moody's
expects this trend to continue because of the company's likely higher
strategic importance to Wuhan city and its success in replacing non-standard
financing debts with lower cost policy bank loans and public bonds.
The company has issued several long-term bonds in the onshore market,
the most recent was a RMB1 billion five-year bond (with a put option
to extend to 20 years) in April 2021.
Moody's also expects the company to reduce its legacy external guarantees
gradually, lowering its contingent risks. By the end of 2020,
HSTIG reported RMB20 billion of external guarantees, representing
31% of the company's reported equity.
In addition, Moody's believes that HSTIG's contingent risk could
be contained at a manageable level. HSTIG provides external guarantees
to local state-owned entities (SOEs) and leading semiconductor
companies it invests in, which are likely to receive government
support when needed.
HSTIG's Baa3 rating considers the Wuhan government's capacity to
support (GCS) score of a3 and Moody's assessment of how the company's
characteristics affect the Wuhan government's propensity to support,
resulting in a three-notch downward adjustment.
The rating reflects Wuhan government's propensity to support HSTIG,
which is based on (1) HSTIG's 100% ownership by the Wuhan East
Lake High Tech Development Zone Administrative Management Committee (the
Committee) under the Wuhan government, (2) its strategic role as
largest entity engaged in developing the Wuhan East Lake High Tech Development
Zone and (3) track record of receiving government cash payments.
However, HSTIG's three-notch downward adjustment reflects
its (1) moderate debt management practices, (2) moderate exposure
to shadow banking and (3) high exposure to contingent risks.
The rating also takes into account the following environmental,
social and governance (ESG) factors.
HSTIG bears high social risks as it implements public initiatives by building,
owning and operating public infrastructure. Demographic changes,
public awareness and social priorities shape the government's targets
for HSTIG and could affect Wuhan government's propensity to support the
company.
Governance considerations are also material to the rating as HSTIG is
subject to oversight by the Wuhan government and has to meet several reporting
requirements, reflecting its public-policy role and status
as a government-owned entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating if China's sovereign rating is
upgraded or Wuhan government's GCS score improves, which could be
a result of a significant strengthening in Wuhan's economic or financial
profile, or its ability to coordinate timely support.
The rating could also be upgraded if HSTIG's characteristics change
in a way that enhances the Wuhan government's propensity to support.
This could be the result of (1) an increase in its strategic significance
to Wuhan and higher-tier government; (2) greater predictability
of government payments to support any additional capital expenditure or
investment in emerging industrials; or (3) decrease in loans,
guarantees or other credit exposures to external parties, relative
to its equity base.
A downgrade is unlikely given the positive outlook. However,
the outlook could return to stable if the abovementioned positive trend
or development reverses, resulting in no change in Wuhan government's
propensity to support HSTIG. This could be the result of (1) a
decline in its position as the largest and dominant public service provider
for the East Lake High Tech Development Zone in Wuhan; (2) rapid
growth in its debt and leverage, with less corresponding government
payments and more reliance on high-cost funding channels,
including non-standard financing; (3) significant changes
in its core business with a substantial expansion of commercial activities
at the cost of its public service functionalities; or (4) substantial
losses in its strategic industry investment activities.
Because HSTIG's rating is based on Wuhan government's GCS
score, the rating could be downgraded if China's sovereign
rating is downgraded, or if the Wuhan government's capacity
to support weakens, which could be a result of a material worsening
in Wuhan's economic or financial profile, or in the government's
ability to coordinate timely support. Changes in the Chinese government's
policies that prohibit governments from supporting local government financing
vehicles will also affect the rating.
The principal methodology used in these ratings was Local Government Financing
Vehicles in China Methodology published in July 2020 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Hubei Science & Technology Investment Group (HSTIG) is the largest
and dominant government-owned entity mandated by the Wuhan East
Lake High Tech Development Zone Administrative Management Committee to
invest, develop and operate the East Lake High Tech Development
Zone. Its primary activities comprise public infrastructure construction,
industrial park development and investments in strategic industries.
The company is also engaged in the sale and maintenance of cars,
property sales and a construction business, and the production and
sale of electronics.
HSTIG was 100% owned by the Committee by the end of 2020.
In 2020, HSTIG reported total assets of RMB188 billion and total
revenue of RMB1.4 billion.
The Local Market analyst for this rating is Yan Li, +86 (106)
319-6572.
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Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
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