Hong Kong, July 06, 2022 -- Moody's Investors Service has upgraded Chengdu High-Tech Investment Group Co. Ltd.'s (Chengdu Hi-tech) issuer rating and the senior unsecured rating assigned to the USD bonds issued by Chengdu Hi-tech to Baa2 from Baa3.
At the same time, Moody's has changed the outlook on Chengdu Hi-tech's to stable from positive.
"The upgrade reflects Chengdu Hi-tech's improved debt management driven by the ongoing rollout of its talent apartment projects and our expectation of its declining commercial exposure, along with its increasing investments in public policy-related projects in next several years,'' says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
Chengdu Hi-tech's Baa2 issuer rating incorporates (1) the Chengdu government's capacity to support (GCS) score of a3; and (2) a two-notch downward adjustment based on Moody's assessment of how the company's characteristics affect the Chengdu government's propensity to support.
To support Chengdu city government's investment in the high-tech industry, Chengdu Hi-tech is building talent apartments in Chengdu High-tech Industrial Development Zone, which accounted for a large share of the company's total capital spending in 2018-20. These apartments, which are aimed to attract talent to Chengdu, are sold to eligible talent at favorable price. Although they receive different regulatory treatment compared with commercial property projects, they are nevertheless subject to market risks inherent in property development.
Chengdu Hi-tech's talent apartment projects have entered the payback cycle and will become more self-funded, reducing its financial risks and funding needs. For example, it recorded RMB2.3 billion income in talent apartment sales for full-year 2021 and will likely further grow its sales in 2022. The proceeds from such sales can support the company's upcoming talent apartment construction, reducing the group's incremental debt growth.
At the same time, Chengdu Hi-tech is expanding its infrastructure investments over the next several years, notably in the area surrounding the newly built Chengdu Tianfu International Airport, also known as Future Technology City.
Chengdu Hi-tech will likely lower and maintain its commercial businesses at the medium level, given its rising investment in government-mandated public infrastructure projects and declining need for incremental debt for its commercial activities. This improvement is a key factor driving the company's rating upgrade.
Moody's also expects Chengdu Hi-tech will continue to have strong funding access, sustainable government cash support and manageable contingent liability exposure.
Moody's assessment of the Chengdu GCS score reflects (1) Chengdu's status as a provincial capital, one of the higher administrative levels in Moody's assessment of the hierarchy of regional and local governments (RLGs) in China, and (2) the city's relatively high contingent liability risks from its state-owned enterprises (SOEs), although such risks are offset by its large and diverse economy.
Chengdu Hi-tech's Baa2 issuer rating also reflects the Chengdu government's propensity to support the company because of (1) the company's majority ownership by the Chengdu Hi-tech Administrative Committee under the Chengdu government, (2) its leading role in investing in, developing and operating the development zone, which contributes 14% to the city's GDP in 2021, and (3) the company's track record of receiving government payments to support its infrastructure investments and other policy-related projects.
However, the two-notch downward adjustment from Chengdu's GCS score reflects Chengdu Hi-tech's (1) risk exposure stemming from its commercial activities, and (2) relatively fast debt growth to support the Chengdu High-Tech Zone's development compared with the government cash payments it receives.
The rating also considers the following environmental, social and governance (ESG) factors.
Chengdu Hi-tech bears high social risks because it implements public-policy initiatives by building public infrastructure in Chengdu city. Demographic changes, public awareness and social priorities shape Chengdu Hi-tech's development targets and ultimately affect the Chengdu government's propensity to support the company.
Governance considerations are also material to the rating, as Chengdu Hi-tech is subject to oversight by and reporting requirements to its owner RLG, reflecting its public policy role and status as a government-owned entity. Chengdu Hi-tech is exposed to low environmental risks.
The stable rating outlook on Chengdu Hi-tech reflects the stable outlook on China's A1 sovereign rating; Moody's expectation that Chengdu's GCS score will remain stable; and the rating agency's view that the company's business profiles and integration with the Chengdu government, as well as the government's control and oversight of the company, will remain largely unchanged over the next 12-18 months.
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 Chengdu city government's GCS score improves, which could arise from a significant strengthening of Chengdu's economic or financial profile, or its ability to coordinate timely support.
The rating could also be upgraded if Chengdu Hi-tech's characteristics change in a way that enhances the Chengdu government's propensity to support. This could arise from (1) a material increase in the company's strategic significance to Chengdu and higher-tier governments; (2) a further improvement in the company's management of its capital expenditure relative to government cash payments; or (3) further declines in the overall risk profile of its commercial operations and its investments in commercial activities compared with its public-policy assets.
Moody's could downgrade the rating if (1) China's sovereign rating is downgraded, (2) the Chengdu government's capacity to support weakens, which could arise from a material worsening of Chengdu's economic or financial profile, or in the government's ability to coordinate timely support; (3) changes in the Chinese government's policies prohibit the Chengdu government from supporting local government financing vehicles; (4) the company's characteristics change in a way that weakens the Chengdu government's propensity to support, such as for example, the company aggressively expands its commercial business, increasing its risk exposure from its commercial business; its debt and leverage rapidly increase without a corresponding rise in government payments, leaving it reliant on higher-cost financing, including through non-standard channels; or its contingent liability exposure risk increases.
The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Chengdu Hi-Tech Investment Group Co. Ltd. (Chengdu Hi-tech) primarily develops and operates the Chengdu High-tech Industrial Development Zone and is involved mainly in infrastructure construction, the provision of industrial and office properties for companies, and the construction of talent apartment projects for talents moving into the zone. It is also engaged in industrial investment under the government's guidance, trading and construction, which mainly serve local infrastructure needs. The company reported revenue and total assets of RMB12.7 billion and RMB152 billion, respectively, in 2021.
As of June 2022, Chengdu Hi-tech is 90% owned by the Chengdu High-Tech Zone Administrative Committee under the Chengdu government. The Sichuan Provincial Finance Department owns the remaining 10% stake.
The local market analyst for these ratings is Sarah Xu, +86 (21) 2057-4030.
REGULATORY DISCLOSURES
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Ivan Chung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
