Hong Kong, September 22, 2020 -- Moody's Investors Service has downgraded to Baa1 from A3 the issuer
rating of China Communications Construction Co., Ltd.
(CCCC).
Moody's has also downgraded to Baa2 from Baa1 the ratings of the
subordinated perpetual notes issued by CCCI Treasure Limited and guaranteed
by CCCC.
The outlook on all ratings has been changed to stable from negative.
"The downgrade of CCCC's issuer rating reflects our expectation
that the company's leverage will remain elevated over the next one
to two years, driven by higher debt to fund public-private
partnership (PPP) investments, and slow EBITDA growth especially
in its overseas businesses due to the coronavirus pandemic,"
says Chenyi Lu, a Moody's Vice President and Senior Credit
Officer.
RATINGS RATIONALE
CCCC's Baa1 rating incorporates its standalone credit strength and a three-notch
uplift based on Moody's expectation of a high level of support from the
Chinese Government (A1, stable) through its state-owned parent,
China Communications Construction Group Limited (CCCG).
CCCC's standalone credit strength is underpinned by its large scale and
more than 60 years' experience in China's transportation and
infrastructure construction industry; good revenue visibility due
to its ample order backlog; and the stable margins in its core construction
business.
At the same time, the company's standalone credit strength is constrained
by its high debt leverage because of its debt-funded investments
in PPP projects; and execution risks related to these PPP investments
and the company's international expansion.
CCCC's leverage -- as measured by adjusted debt/EBITDA -
increased to 9.0x in the 12 months to June 2020 from 7.6x
in 2019, as debt increased to fund larger working capital needs
amid coronavirus disruptions and PPP investments. Moody's
expects CCCC's leverage to remain elevated at 8.9x in 2020 in the
absence of meaningful deleveraging initiatives, before modestly
declining to 8.5x-8.7x in 2021 and 2022. Such
leverage is consistent with the company's lower rating.
CCCC has sizeable overseas operations when compared with other Chinese
state-owned construction companies. Moody's therefore
expects that CCCC's overall revenue and EBITDA growth to face more
uncertainties amid the global spread of coronavirus. Between 2017
and the first half of 2020, CCCC generated around 16%-24%
of its's total revenue overseas, compared to the 11%
average for the overall state-owned construction companies.
Moody's support assessment reflects CCCC's critical role in the development
of China's infrastructure, its importance to CCCG and the latter's
majority ownership of the company, the track record of government
support for CCCC through CCCG, and the Chinese government's strong
ability to provide support, as reflected by the sovereign's A1 rating.
CCCC accounted for around 84% and 69% of CCCG's consolidated
revenue and assets respectively in 2019, and Moody's regards
the two companies' credit profiles as closely linked.
The ratings also take into account the following environmental,
social and governance (ESG) factors.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
In terms of governance risks, the rating takes into account the
fact that CCCC is controlled, supervised, and monitored by
CCCG, a 100% government-owned entity under the central
government.
As a listed company on the Shanghai and Hong Kong stock exchanges,
CCCC provides good disclosure of its businesses and financial performance.
The company is led by an experienced management team and has a sound track
record of project execution. The company's tendency to debt-fund
its growth is counterbalanced by the government oversight and directive
to deleverage.
The stable outlook reflects Moody's expectation that over the next 12
to 18 months, CCCC's business and financial profiles will
remain stable, and its importance to CCCG and ultimately the central
government, as well as the government's ability to provide support,
will remain intact.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CCCC's ratings would be upgraded if the company's standalone credit
profile improves without any material change in the support assumption.
CCCC's standalone profile could improve if the company maintains a prudent
investment strategy; improves its debt leverage through stronger
cash flow generation and asset disposals, and successfully manages
its overseas business while minimizing the related execution risks.
Credit metrics indicating of an upgrade include adjusted debt/EBITDA falling
below 7.0x on a sustained basis.
Moody's could also upgrade CCCC's rating, without upgrading
its standalone credit strength, if Moody's assesses that the
company's importance to its parent and ultimately the Chinese government
has increased.
CCCC's ratings would be downgraded if Moody's lowers the company's standalone
credit strength because of a material deterioration in its business or
financial profile, without any material change in the support assessment.
CCCC's standalone credit profile could weaken if it undertakes aggressive
investments in PPP projects, resulting in a deterioration in its
financial profile; if there is a substantial decline in its new contract
intakes, with its order backlog falling below 1.5x of revenue;
or material execution risks arise in either the domestic or international
markets.
Credit metrics indicating a downgrade include adjusted debt/EBITDA in
excess of 8.5x-9.0x on a sustained basis.
Moody's could also downgrade CCCC's rating, without lowering its
standalone credit strength, if Moody's assesses the company's
importance to CCCG and the Chinese government has declined.
The principal methodology used in these ratings was Construction Industry
published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Beijing, China Communications Construction Co.
Ltd. is a large engineering and construction group, with
business scopes covering all-round construction services,
including construction and contracting, survey, design and
consultancy in various infrastructure projects. The company is
one of the largest construction companies in China, and has leading
market positions in road, bridge and port construction.
The company was 57.96%-owned by China Communications
Construction Group Limited, a state-owned enterprise wholly
owned by the State-Owned Assets Supervision & Administration
Commission under the State Council of the People's Republic of China as
of 30 June 2020.
The local market analyst for these ratings is Sue Su, +86 (10)
6319-6505.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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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