Hong Kong, March 26, 2021 -- Moody's Investors Service has changed to negative from stable the
outlook of Yinchuan Tonglian Capital Investment Operation Co.,
Ltd. (Yinchuan Tonglian).
At the same time, Moody's has affirmed Yinchuan Tonglian's
Baa3 issuer rating.
"The outlook change to negative reflects our concern that the National
Association of Financial Market Institutional Investors' (NAFMII)
disciplinary warning to Yinchuan Tonglian indicates weakness in the company's
corporate governance and could influence creditors' confidence on
Yinchuan Tonglian such that, for example, it affects the company's
access to funding," says Roy Zhang, a Moody's Vice President
and Senior Analyst.
The rating affirmation reflects our expectation that NAFMII's disciplinary
warning will not materially affect the Yinchuan city government's
propensity to support Yinchuan Tonglian, given the latter is the
largest provider of essential public services and largest owner of key
public infrastructure projects in Yinchuan city.
RATINGS RATIONALE
Yinchuan Tonglian's Baa3 rating is based on the Yinchuan government's
capacity to support (GCS) score of baa1, and Moody's assessment
of how the company's characteristics affect the Yinchuan government's
propensity to support, resulting in a two-notch downward
adjustment.
The two-notch downward adjustment reflects the company's
evolving corporate structure and moderate exposure to commercial activities
and contingent risk.
As the largest state-owed enterprise (SOE) in Yinchuan city,
Yinchuan Tonglian is mainly responsible for urban infrastructure construction
in the city. It is also engaged in policy mandates that are essential
to livelihoods, such as gas supply and public transportation.
It maintains good relationship with major banks in the region.
Moody's believes the Yinchuan government will also mobilize resources
to support the company's liquidity needs, if needed.
On 22 March 2021, NAFMII issued a disciplinary warning to Yinchuan
Tonglian regarding its non-compliance of disclosure requirements.
The company recommends a series of rectification measures to improve its
information disclosure. Moody's will monitor the implementation,
and assess the effectiveness, of these measures.
Yinchuan Tonglian's rating also takes into account the following environmental,
social and governance (ESG) factors.
Yinchuan Tonglian bears high social risks as it implements public-policy
initiatives by building public infrastructure in Yinchuan city.
Demographic changes, public awareness and social priorities shape
Yinchuan's development targets and ultimately affect the Yinchuan
government's propensity to support the company.
Governance factors are also material to the rating on Yinchuan Tonglian.
Today's rating action considers the potential negative impact due to weakness
in corporate governance on the company's credit profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely given the negative outlook. However,
the outlook could return to stable if Yinchuan Tonglian's rectification
measures improved its corporate governance and the company continues to
demonstrate a stable access to funding.
The rating could be downgraded if the weakness in corporate governance
adversely influences Yinchuan Tonglian's credit profile resulting
in, for example, a significantly weakening the company's
access to funding.
The rating could also be downgraded if the Yinchuan government's
propensity to support weakens because of changes in Yinchuan Tonglian's
characteristics such as 1) a decline in its position as the largest and
dominant public service provider in Yinchuan city; 2) material changes
in its core business with substantial expansion of commercial activities
at the cost of its public service functionalities, or substantial
losses in its commercial activities; 3) rapid increases in its debt
and leverage, with less corresponding government payments;
and 4) a material increase in contingent liabilities.
Because Yinchuan Tonglian's rating is based on Yinchuan government's GCS
score, the rating could also be downgraded if (1) China's sovereign
rating is downgraded, or (2) if the Yinchuan government's capacity
to support weakens, which could be a result of a material worsening
in Yinchuan'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.
Founded in 2008, Yinchuan Tonglian Capital Investment Operation
Co., Ltd. is 100% owned by the Yinchuan government.
The company is the largest SOE in Yinchuan city, and engages in
various businesses, including municipal infrastructure projects
construction, public transportation and gas supply in Yinchuan city.
The local market analyst for these ratings is Cindy Yang, +86
(10) 6319-6500 .
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Roy Zhang
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Corporate Finance Group
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