Hong Kong, November 25, 2021 -- Moody's Investors Service has placed on review for upgrade the Baa2
issuer rating of Jiangxi Provincial Water Conservancy Invt Grp (Jiangxi
Water), and the Baa2 senior unsecured rating on the bonds issued
by Jiangxi Provincial Water Conservancy (China) and guaranteed by Jiangxi
Water. Moody's has also changed the outlook to ratings under
review from stable.
"The review for upgrade reflects the elevated strategic importance of
Jiangxi Water in the provincial government's 14th Five Year Plan.
As such, we expect higher clarity and certainty of government support
for the company's water supply integration projects across counties
and districts in Jiangxi province," says Cedric Lai, a Moody's
Vice President and Senior Analyst, adding "The enhanced government's
propensity to support is likely to result in a rating upgrade in the near
term."
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
Jiangxi Water's rating incorporates a one-notch downward
adjustment reflecting uncertainties in the timeliness and priority of
government support in these water integration projects in rural areas,
which require substantial investments by the company to upgrade the infrastructure
and have relatively low tariffs. Recent government policy documents
have highlighted the importance of water supply security in the 14th Five
Year Plan and added more clarity regarding government support for these
projects. Moody's will decide if these policy statements
will remove the uncertainties reflected in the one-notch downward
adjustment during the review period.
As the sole provincial water conservancy platform in Jiangxi province,
Jiangxi Water undertakes key water conservancy projects, urban and
rural water supply integration projects that the company acquires and
manages under government mandate. As of the end of 2020,
Jiangxi Water has consolidated 51 water supply companies in counties and
districts in Jiangxi, covering over half of the population in the
province.
According to recent guidelines and policies published by the central and
Jiangxi provincial governments, notably "The 14th five-year
plan for security in water supply" published by Jiangxi provincial
department of water resources in September 2021, the company's
urban and rural water supply integration projects are defined as key public
infrastructure in rural areas backed by strong government support.
These urban and rural water supply integration projects are essential
to ensuring the quality and standard of water supplied to rural residents,
which has become a key initiative for Jiangxi provincial government.
Moreover, such projects are also emphasized in the central government's
rural revitalization strategy.
Furthermore, Jiangxi province is an important province for the water
conservancy sector because of its abundant water resources. Moody's
believes under the central and provincial government's new five-year
plan, such water conservancy projects and water supply infrastructure
will become more important given the country's development focus
to improve the overall living standard and safety of urban and rural residents.
With the elevated strategic importance, Jiangxi Water will benefit
from enhanced priority of government's funding support and access
to low cost funding such as loans from policy banks. It points
towards increased government's propensity to support that will likely
result in a rating upgrade.
Jiangxi Water's Baa2 issuer rating is based on (1) Jiangxi provincial
government's GCS score of a2; (2) Moody's assessment of how the company's
specific characteristics affect the Jiangxi provincial government's propensity
to provide support, which results in a three-notch downward
adjustment.
Moody's assessment of Jiangxi's GCS score reflects (1) its status as a
province with direct reporting lines to the central government and its
positioning at one of the higher administrative levels in Moody's assessment
of the hierarchy of China's regional and local governments (RLGs);
(2) its moderate economic and fiscal profiles, relatively moderate
risks from the local banking system and relatively low contingent liability
risks from its state-owned enterprises (SOEs).
Jiangxi Water's Baa2 issuer rating reflects the Jiangxi government's propensity
to support the company, given (1) the provincial government's ultimate
ownership of the company and Jiangxi Water's role as the sole provincial
water conservancy platform; (2) the track record of government cash
payment; and (3) Jiangxi Water's strong access to funding.
However, the three-notch downward adjustment from Jiangxi
government's GCS score mainly reflects 1) Jiangxi Water's medium
exposure and investment in commercial businesses, which mainly include
construction, solar and hydro renewable projects, and local
property development, 2) its relatively fast debt growth to support
the investment in water supply and water conservancy projects relative
to government cash payments, and 3) the uncertainty relating to
the acquisition of water supply plants within provinces where the credit
quality of the targets and timing of the acquisition are unclear.
The rating also takes into account the following environmental,
social and governance (ESG) factors.
Jiangxi Water's environmental risk is considered as moderate.
Jiangxi is a province with abundant water resources, and the company's
operations could be affected by any water diversion and pollution;
for example, the water quality of its reservoir or incoming polluted
raw water for its water supply plants. However, the company's
policy goal to conserve water resources within the province and its importance
in flood control are in line with the national policy, and Moody's
expects to see policy support and its compliance with environmental regulations.
Jiangxi Water bears high social risks due to its engagement in large-scale
water conservancy project investments and water supply projects that could
affect the health and safety of the province's residents. The water
projects undertaken by Jiangxi Water carry significant social functions
for the benefit of Jiangxi residents, including flood control and
maintaining the quality and capacity of water supply in the province,
benefiting over half of the population of Jiangxi province.
Governance considerations are also material to the ratings, as Jiangxi
Water is subject to oversight and reporting requirements to its owner
RLG, reflecting its public policy role and status as a government-owned
entity.
Moody's review will focus on Jiangxi Water's progress on urban and
rural water supply integration projects, corresponding government
policy support, and funding arrangements from policy banks.
Moody's could upgrade the rating if the rating agency sees strengthening
government policy support for urban and rural water supply integration
projects.
The rating could also be upgraded if (1) China's sovereign rating
is upgraded or the Jiangxi government's GCS strengthens, which
could be a result of a material strengthening of Jiangxi government's
economic or financial profile, or their ability to coordinate timely
support; (2) Jiangxi Water's specific characteristics change in a
way that enhances the Jiangxi government's propensity to support the company,
such as a significant improvement in the visibility of government recurring
support, including the provision of grants and subsidies.
A downgrade of the ratings is unlikely given the review for upgrade.
However, Moody's could confirm the rating if Jiangxi Water has made
little progress in receiving timely government support for the urban and
rural water supply integration projects.
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.
Established in 2008, Jiangxi Provincial Water Conservancy Invt Grp
(Jiangxi Water) is the sole provincial-level water conservancy
state-owned enterprise (SOE) within Jiangxi province. The
company is 90% owned by Jiangxi Provincial State-owned Assets
Supervision & Administration Commission (Jiangxi SASAC) and 10%
owned by Jiangxi Administration Asset Group Co Ltd. Jiangxi Water's
business activities include investments in and the operation of water
conservancy projects, urban and rural water supply integration,
hydropower and solar projects. The company reported revenue of
RMB4.7 billion for full year of 2020; and total assets recorded
RMB59.7 billion as of end-2020.
The local market analyst for these ratings is Sarah Xu, +86
(212) 057-4030.
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Cedric Lai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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MD - Corporate Finance
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