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Rating Action:

Moody's upgrades Hubei Science & Technology Investment Group's rating to Baa2; outlook stable

 The document has been translated in other languages

04 Jul 2022

Hong Kong, July 04, 2022 -- Moody's Investors Service has upgraded Hubei Science & Technology Investment Group (HSTIG)'s issuer rating to Baa2 from Baa3.

At the same time, Moody's has changed the rating outlook to stable from positive.

RATINGS RATIONALE

"The rating upgrade reflects HSTIG's reduction in contingent risk exposures to a moderate from high level, resulting in an improvement in the government's propensity to support the company and our expectation that the company will maintain its credit quality commensurate with the Baa2 rating level amid its expansion over the next 2-3 years," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

As of the end of 2021, HSTIG reported RMB19 billion of external guarantees, representing 24% of the company's reported equity - a significant drop from 31% as of the end of 2020. Moody's expects the company to continue reducing its legacy guarantees gradually and that HSTIG could contain its contingent risks at a manageable level. HSTIG mainly provides external guarantees to local state-owned entities (SOEs) and leading semiconductor companies it has invested in.

HSTIG's Baa2 rating considers the Wuhan government's capacity to support (GCS) score of a3 and Moody's assessment of how the company's characteristics affect the Wuhan government's propensity to support, resulting in a two-notch downward adjustment.

The rating reflects Wuhan government's propensity to support HSTIG, which is based on HSTIG's 100% ownership by the Wuhan East Lake High Tech Development Zone Administrative Management Committee (the Committee) under the Wuhan government, its strategic role as largest entity engaged in developing the Wuhan East Lake High Tech Development Zone and track record of receiving government cash payments.

However, HSTIG's two-notch downward adjustment reflects its faster debt growth relative to government payments, and risk exposure to mandated investments in strategic industries and contingent liabilities.

HSTIG serves an important public policy function and is strategically important to Wuhan government. Based on the provincial government's plan for the development of the Optical Valley Technology Innovation Corridor, the company's role will further expand. It will undertake more public policy projects and strategic industry investments over the next several years. At the same time, Moody's expects HSTIG to receive more government cash payments, including equity injections and allocation of government special-purpose bond proceeds, to support the expanded government mandated public projects and investments.

In February 2021, Hubei Provincial Government announced the strategic development of the Optical Valley Technology Innovation Corridor (2021-2035). The aim is to implement the urbanization of Wuhan metropolitan area and the high-quality development of Hubei province. HSTIG is mandated by the government as the sole entity to construct and operate municipal roads and infrastructure, and will serve as a public infrastructure platform for Optical Valley Science Island, which is the initial phase of the Optical Valley Corridor.

In 2021, HSTIG received around RMB12.8 billion of total of government cash payments, which include RMB1.5 billion of government special-purpose bonds to support the Yangtze Memory industrial park development.

Although the government provides substantial cash injections, part of the capital spending still needs to be funded by debt. Moody's forecasts HSTIG's annual capital spending will be around RMB22 billion-RMB24 billion over the next 12 months and that its debt will continue to grow to RMB142 billion-RMB159 billion over the next 12-18 months.

The rating also takes into account the following environmental, social and governance (ESG) factors.

HSTIG bears high social risks as it implements public initiatives by building, owning and operating public infrastructure. Demographic changes, public awareness and social priorities shape the government's targets for HSTIG and could affect Wuhan government's propensity to support the company.

Governance considerations are also material to the rating as HSTIG is subject to oversight by the Wuhan government and has to meet several reporting requirements, reflecting its public-policy role and status as a government-owned entity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

HSTIG's stable rating outlook reflects (1) the stable outlook on the Chinese government's sovereign rating; (2) Moody's expectation that the Wuhan city government's capacity to support will remain stable; and (3) Moody's view that the company's business profile and integration with Wuhan government, and the government's control and oversight of the company, will remain largely unchanged over the next 12 -18 months.

The rating could be upgraded if HSTIG's characteristics change in a way that enhances the Wuhan government's propensity to support. This could be the result of an increase in HSTIG's strategic significance to Wuhan and higher-tier government; or increased predictability in government payments to support any additional capital expenditure or investment in emerging industries.

The rating could also be upgraded if China's sovereign rating is upgraded or Wuhan government's GCS score strengthens, which could be a result of a significant strengthening in Wuhan's economic or financial profile, or its ability to coordinate timely support.

The rating could be downgraded if HSTIG's characteristics change in a way that weakens its regional and local government (RLG) owners' propensity to provide support. For example, a decline in its position as the largest and dominant public service provider for the East Lake High Tech Development Zone in Wuhan; rapid growth in its debt and leverage, with less corresponding government payments and more reliance on high-cost funding channels, including non-standard financing; significant changes in its core business with a substantial expansion of commercial activities at the cost of its public service functions, or substantial losses in its strategic industry investment activities.

Because HSTIG's rating is based on Wuhan government's GCS score, the rating could also be downgraded if China's sovereign rating is downgraded, or if the Wuhan government's capacity to support weakens, which could be a result of a material weakening in Wuhan's economic or financial profile, or in the government's ability to coordinate timely support. Changes in the Chinese government's policies that prohibit governments from supporting local government financing vehicles will also affect the rating.

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.

Hubei Science & Technology Investment Group (HSTIG) is the largest and dominant government-owned entity mandated by the Wuhan East Lake High Tech Development Zone Administrative Management Committee to invest, develop and operate the East Lake High Tech Development Zone. Its primary activities comprise public infrastructure construction, industrial park development and investments in strategic industries. The company is also engaged in the sale and maintenance of cars, property sales and a construction business, and the production and sale of electronics.

HSTIG was 100% owned by the Committee as of the end of 2021. In 2021, HSTIG reported total assets of RMB221 billion and total revenue of RMB1.7 billion.

The local market analyst for these ratings is Yan Li, +86 (106) 319-6572.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

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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 entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody's Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.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

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

No Related Data.
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