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Rating Action:

Moody's downgrades Road King Infrastructure to Ba2; outlook negative

30 Apr 2007
Moody's downgrades Road King Infrastructure to Ba2; outlook negative

Hong Kong, April 30, 2007 -- Moody's Investors Service has downgraded the corporate family rating of Road King Infrastructure Ltd (Road King) to Ba2 from Ba1. Moody's has also downgraded the senior unsecured rating on Road King Infrastructure Finance (2004) Ltd's bonds to Ba2 from Ba1. The outlook for the ratings is negative. This concludes Moody's review initiated on Jan 26, 2007.

At the same time, Moody's has assigned a Ba2 rating on the proposed 7-year US$200 million fixed-rate senior unsecured bonds, and the proposed 5-year US$100 million floating-rate senior unsecured bonds, to be issued by Road King Infrastructure Finance (2007) Ltd. The outlook for the ratings is negative.

"The rating action reflects the increase in Road King's business and financial risks as a result of the company's continued debt-funded investments in China's property development sector," says Renee Lam, a Moody's Vice President/Senior Analyst and lead analyst for Road King.

"While Road King still enjoys stable recurring cash flow generated from its diversified portfolio of toll road projects across China, the Ba2 rating better reflects its heightened financial and operational risks, as property development is significantly more cyclical than toll road operations," says Lam. "Besides, Road King's ability to manage a property operation at such an expanded scale is untested."

In addition to the initial cash outlays for its acquisition of Sunco, there will be a potential need for further funding of construction costs prior to recouping cash flows from project launches, resulting in pressure on the company's level of financial leverage. That said, Moody's recognizes the Sunco acquisition would significantly enhance the size and geographical diversity of Road King's land bank.

After completing the transaction, Road King's property business would account for 60-80% of its operating cash flow in the next three years and over 60% of its consolidated assets. Moody's had previously stated downward rating pressure could emerge if the property business accounted for over 60-70% of total cash flow and over 50% of assets.

Furthermore, Moody's now considers Road King's overall credit profile as more comparable to other property development companies. However, when compared with Ba2-rated China property developers, such as Hopson Development Holdings Ltd (Hopson) and Greentown China Holdings Ltd (Greentown), it has a shorter track record in managing a sizable property portfolio.

In addition, a number of its property projects are in cities less affluent than those of Hopson and Greentown, and its overall portfolio quality is more consistent with a low-Ba /high-B profile. Offsetting these risks is the very stable recurring cash flow generated from its diversified toll road portfolio, and its long operating track record in managing such projects. Cash generated from toll roads is expected to cover 1-2x of total interest costs over the next three years, thereby supporting the Ba2 rating.

The negative outlook reflects Moody's concern over the substantial execution risks that Road King faces in relation to its recent property acquisitions. In particular, its ability to simultaneously manage multiple project constructions and launches will be instrumental to its maintenance of its healthy cash flow and liquidity positions. The negative outlook also reflects uncertainties over the magnitude of liabilities that Road King could incur in relation to its Sunco acquisition and to funding of projected large construction costs.

The rating outlook could stabilize if 1) the company establishes a longer track record for managing larger scale property development projects; 2) achieves property sales, as planned, to partly alleviate ongoing construction funding needs; and 3) adjusted leverage stabilizes at 50-55%. Maintenance of appropriate back-up liquidity would also be important factor for a stable outlook.

Downward rating pressure would emerge if Road King takes on further sizeable property or land bank acquisitions, such that adjusted debt to capital rises to 55%-60% and operating cash flow (OCF)/interest falls below 3x. A deterioration in the performance and hence cash flow generation capacity of its toll road business, with cash generated from toll roads to total interest falling below 1x, would also be negative for the rating.

Established in 1994, Road King is a Hong Kong-listed company with investments in toll roads and property development projects in China. As of Dec 2006, the company had toll road investments of around HK$6 billion and mileage of approximately 1,000 kilometers spread throughout eight provinces in China. The company also had an attributable land bank of 2.9 million sq m across two provinces at end-Dec 2006.

Hong Kong
Renee Lam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

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