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Rating Action:

Moody's upgrades China Travel Service to A3; outlook stable

 The document has been translated in other languages

13 Sep 2018

Hong Kong, September 13, 2018 -- Moody's Investors Service has upgraded to A3 from Baa1 the issuer rating of China Travel Service (Holdings) Hong Kong Ltd (CTS) and the backed senior unsecured bond rating of its subsidiary, King Power Capital Limited.

The ratings outlook is stable.

RATINGS RATIONALE

"The upgrade of CTS reflects its close links with its parent, China National Travel Service Group Corporation Limited (CNTS), and our expectation that CNTS' credit quality will continue to improve over the next two years, resulting in a strengthened ability to provide support," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

CNTS' strengthened credit quality reflects its improving efficiency and competitive position in China's travel industry. In addition, CNTS' adjusted debt/EBITDA (excluding CTS International Logistics Corporation Ltd and Shaanxi Weihe Power Co., Ltd.) improved to 2.5x in 2017 from 2.9x in 2016 following its merger with China International Travel Service Group Corporation in 2016.

Moody's expects CNTS' adjusted debt/EBITDA will decline further to 1.0x-1.5x over the next two years. This improvement will be supported by a likely improvement in revenue and earnings, in particular from its duty free and tourist attraction businesses, and a decline in debt levels from expected strong free cash flow generation.

"The upgrade also reflects our expectation that CTS' financial leverage will improve over the next two years, underpinned by lower debt levels and higher earnings," adds Lu.

Moody's expects that CTS' adjusted debt/EBITDA (excluding CTS' logistics business) will improve to about 3.0x-3.5x over the next two years from 4.2x in 2017 driven by (1) lower debt from strong free cash flow generation for debt repayment owing to improved earnings and limited capital spending to support its expanded operations; and (2) higher revenues and earnings owing to expected improvements in its tourist attraction businesses.

CTS' A3 issuer rating continues to incorporate a two-notch uplift based on expected support from CNTS, or indirectly from the Government of China (A1 stable), in times of need.

The support assumption considers (1) CTS' role as the core and wholly-owned subsidiary of CNTS, (2) CTS' importance in the group as the primary provider of travel and travel document services, as well as its role in the Chinese government's strategy to stimulate private consumption; and (3) CNTS' strong ability to provide support, based on its strengthened credit quality.

Given these factors, Moody's believes that the two companies' credit profiles are closely linked. The linkage also reflects the two companies' shared management team and the track record of support to CTS from CNTS.

CTS' Baa2-level standalone credit strength reflects (1) the company's strong brand in China as one of the leading travel services providers, (2) the company's long track record of more than 90 years in China's travel service industry, (3) the steady rise in demand for leisure travel in China, and (4) its solid liquidity position.

However, CTS' standalone credit profile is constrained by: (1) its exposure to the real estate development market, which entails business risks; (2) its expansion in its tourist attraction businesses, leading to execution risks, and (3) its moderate level of debt leverage, which is however declining.

The stable outlook incorporates Moody's expectation that over the next two years (1) the company's credit metrics will be maintained at levels that are appropriate for its current standalone credit quality; (2) the company's importance to CNTS will remain unchanged and (3) the company's significant importance to the Chinese government and the government's ability to provide support will remain intact, the latter of which is mirrored in the stable outlook on China's sovereign rating.

Because CNTS and CTS' credit profiles are closely linked, CTS' ratings could be upgraded over time if CNTS can improve its business and financial profiles through enhancing its earnings and reducing its debt, without a material weakening in CTS' strategic importance to its parent.

Credit metrics that could indicate upward pressure on CTS' ratings include adjusted debt/EBITDA at CNTS falling below 1.0x on a sustained basis.

CTS' ratings could be downgraded if there is a material deterioration in CNTS' business or financial profile without a material change in the support assessment.

Credit metrics indicative of downward pressure on CTS' ratings include adjusted debt/EBITDA at CNTS rising above 3.0x on a sustained basis.

The ratings could also be downgraded with CTS' current standalone credit quality if Moody's support assessment for the company from its parent weakens. This could result from a decline in CTS' importance to its parent.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1928 and headquartered in Hong Kong, China Travel Service (Holdings) Hong Kong Ltd operates three main business segments: travel services, real estate development, and financial services.

It is wholly owned by China National Travel Service Group Corporation Limited, a state-owned enterprise wholly owned by the State Council of China and supervised by the State-owned Assets Supervision and Administration Commission.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entites are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

Gary Lau
MD - Corporate Finance
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

No Related Data.
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