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Rating Action:

Moody's upgrades China Travel Service to Baa1; outlook stable

 The document has been translated in other languages

17 Oct 2017

Hong Kong, October 17, 2017 -- Moody's Investors Service has upgraded to Baa1 from Baa3 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.

This action concludes the ratings review initiated on 26 July 2017.

RATINGS RATIONALE

"The upgrade reflects our expectation that CTS' financial leverage will continue to improve over the next 12-18 months, underpinned by a solid rise in earnings, and despite the transfer of its logistics business and a slight increase in debt to support its expanded operations," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

Moody's expects that CTS' adjusted debt/EBITDA and adjusted funds from operations (FFO)/debt to improve to about 4.0x-4.5x and 19.5%-20%, respectively, over the next 12-18 months from 5.3x and 16.9% (excluding CTS' logistics business) in 2016, and 6.9x and 11.1% (including CTS' logistics business) in 2015.

These credit metrics are in line with the company's Baa3-level standalone credit strength, which is also up from the Ba2-level earlier.

"The upgrade also reflects parent China National Travel Service Group Corporation's (CNTS) improved credit profile following its merger with China International Travel Service Group Corporation (CITS Group) in 2016," adds Lu.

Moody's expects CTS to grow its revenue on average on a low-single-digit percent basis annually over the next two years, driven by its improving hotel operations and the existence of business synergies between CTS and China International Travel Service Co. Ltd. (CITS). However, these benefits will be partly offset by lower revenue from the real estate development business.

CTS' adjusted EBITDA margin should improve to about 20% over the next 12-18 months from 16.5% in 2016, underpinned by (1) the company's continued focus on profitable operations, and cost and expense controls; and (2) an expected stronger gross profit contribution from the real estate development business, despite a projected decline in real estate revenue by 7% annually in 2017 and 2018.

On the other hand, CTS' adjusted debt is likely to increase slightly to about RMB19.2 billion by 2018 from RMB18.3 billion in 2016 to support its expanded operations.

CTS' Baa1 issuer rating continues to incorporates a two-notch uplift, based on expected support from its parent, 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 largest subsidiary of CNTS, (2) the important role that CTS plays in CNTS as the primary provider of travel and travel document services for the group; and its role in the Chinese government's strategy to stimulate consumption by the public; and (3) CNTS' strong ability to render support, based on its strengthened credit quality.

Given these factors, Moody's believes that the two companies' credit profiles are closely linked.

CNTS' strengthened credit quality reflects its improving efficiency and competitive position in the travel industry in China and a significant decrease in its adjusted debt/EBITDA to 3.1x in 2016 from 6.4x in 2015, following the merger with CITS Group.

CTS' standalone credit strength reflects (1) the company's strong brand in China as one of the leading travel services providers, (2) the consideration that it benefits from the steady rise in demand for leisure travel in China, (3) Moody's expectation of an improvement in the profits of its property business, and (4) its strong liquidity position.

However, CTS' standalone credit profile is constrained by (1) the high execution risks associated with the rapid expansion of its property business, and (2) its high level of debt leverage, which is, however, declining.

The stable outlook incorporates Moody's expectations over the next 12-18 months that (1) the company's credit metrics will be maintained at levels that are appropriate for its current standalone credit quality; and (2) there will be no material changes in its overall business profile, its strategic importance to its parent and the parent's ability to provide support.

CTS' rating could be upgraded over time if both the company and CNTS can improve their business and financial profiles significantly through enhancing earnings and reducing debt, absent any material weakening in CTS' strategic importance to the parent.

Credit metrics for CTS that could indicate upward pressure on its rating include adjusted debt/EBITDA below 3.0x on a sustained basis.

CTS' rating would be downgraded if there is a material deterioration in its business or financial profile, absent any material changes in the support assessment.

Credit metrics indicative of downward pressure on its rating include adjusted debt/EBITDA above 5.5x-6.0x on a sustained basis.

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

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 Corporation, 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.

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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