China State Construction Finance (Cayman) III -- Moody's affirms China State Construction International's Baa2 ratings; outlook stable
Rating Action: Moody's affirms China State Construction International's Baa2 ratings; outlook stable
Global Credit Research - 29 Jul 2020
Note: On July 29, 2020, the press release was corrected as follows: the following were added as the eleventh and twelfth paragraphs of the Ratings Rationale section:
As a listed company on the Hong Kong Stock Exchange, CSCI provides good disclosure of its businesses and financial performance. The company is led by an experienced management team in the construction industry with a sound track record of project execution. The company also seeks to control its leverage growth as per the governments oversight and directive to deleverage.
The stable outlook on the issuer rating reflects Moody's expectation that over the next 12-18 months, CSCI's standalone credit profile will remain stable, and there will be no material changes in its importance to CSCEC, or in CSCEC's ability to provide support.
Revised release follows.
Hong Kong, July 29, 2020 -- Moody's Investors Service has affirmed the Baa2 issuer rating of China State Construction International Holdings Limited (CSCI).
Moody's has also affirmed the Baa2 ratings on the senior unsecured notes and senior unsecured perpetual securities issued by China State Construction Finance (Cayman) II Ltd and China State Construction Finance (Cayman) I Ltd respectively, and guaranteed by CSCI, and the Baa3 ratings on the subordinated perpetual notes issued by China State Construction Finance (Cayman) III Ltd, and also guaranteed by CSCI.
The outlook on the ratings is stable.
"The affirmation of CSCI's issuer rating reflects (1) its high revenue visibility given its robust order backlog, (2) the strong support from its ultimate parent, and (3) the measures it undertook to decelerate its capital-intensive investments and debt growth," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
CSCI's Baa2 issuer rating incorporates its standalone credit strength and a two-notch uplift based on Moody's expectation of strong parental support from its ultimate parent China State Construction Engineering Corporation (CSCEC) - the largest construction company by revenue in China, which is 100% owned by the Chinese government (A1 stable).
CSCI's standalone credit strength is supported by its (1) solid operating track record and strong market position in the construction sector in Hong Kong SAR and Macau SAR; (2) strong business visibility owing to its ample order backlog; and (3) proven access to onshore and offshore debt and equity markets.
On the other hand, the company's credit profile is constrained by (1) its relatively small business scale and limited diversification; (2) the increasing debt and operational risks associated with its investments in infrastructure projects; and (3) its involvement in large-scale projects, which entail execution risks given the company's relatively small business scale.
Moody's expects CSCI's leverage -- as measured by adjusted debt/EBITDA -- will temporarily peak at around 5.8x-5.9x in the next 12 to 18 months amid coronavirus-induced disruptions, before gradually trending down to around 5.5x. Such leverage level is consistent with its standalone credit profile.
CSCI is taking proactive measures, such as curbing its investments in mainland China to control its debt growth. For example, CSCI's order backlogs for capital-intensive investment projects in China dropped 17% in 2019 when compared with 2018.
In addition, a large portion of receivables related to CSCI's existing infrastructure investment projects in mainland China are due in the next two years, which will help narrow its funding gap. This will also partially mitigate the temporary impact of coronavirus disruptions, and the expected gradual decline in CSCI's margins in the next one to two years due to higher contributions from lower-margin construction contracts.
Moody's expectation of strong parental support reflects: (1) CSCI's role as CSCEC's only platform for developing construction projects in Hong Kong SAR and Macau SAR and for raising offshore funds for infrastructure and construction projects in mainland China, (2) the parent's track record of providing financial support to CSCI, and (3) the integral role that CSCI plays in the CSCEC group by working closely with its onshore subsidiaries on construction projects under the "CSCEC" umbrella.
The ratings also take into account the following environmental, social and governance (ESG) considerations.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Regarding governance risks, the rating takes into account the fact that CSCI is ultimately controlled, supervised and monitored by CSCEC, which in turn is a government-owned entity under the State-owned Assets Supervision and Administration Commission (SASAC) of China.
As a listed company on the Hong Kong Stock Exchange, CSCI provides good disclosure of its businesses and financial performance. The company is led by an experienced management team in the construction industry with a sound track record of project execution. The company also seeks to control its leverage growth as per the governments oversight and directive to deleverage.
The stable outlook on the issuer rating reflects Moody's expectation that over the next 12-18 months, CSCI's standalone credit profile will remain stable, and there will be no material changes in its importance to CSCEC, or in CSCEC's ability to provide support.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade CSCI's issuer rating if the company's standalone credit profile improves without any material changes in the support assessment.
The company's standalone credit profile could improve if the company (1) strengthens its market position and broadens its business scale; (2) maintains strong sales visibility while keeping a prudent investment strategy; (3) continues its strong business execution without major cost overruns or delays; and (4) improves its debt leverage.
Credit metrics indicative of an upgrade include adjusted CSCI's debt/EBITDA falling below 3.5-4.0x on a sustained basis.
Moody's would downgrade CSCI's issuer rating if there is a material deterioration in its business and financial profiles, or if there are signs of weakening support from CSCEC.
CSCI's standalone credit profile could come under pressure if (1) the company faces significant execution risks, such as cost overruns or project delays, which negatively affect its profitability or cash collections; (2) its order backlog falls below 1.0x of total annual sales; and (3) its credit metrics weaken.
Credit metrics indicative of a downgrade include CSCI's adjusted debt/EBITDA remaining above 5.5-6.0x for a prolonged period.
The principal methodology used in these ratings was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Listed on the Hong Kong Stock Exchange since July 2005, China State Construction International Holdings Limited (CSCI) started its operations in Hong Kong in 1979 and is now one of the largest construction contractors in Hong Kong SAR and Macau SAR. The company expanded its operations into mainland China in 2007. Its business in the mainland consists of affordable housing and infrastructure projects.
At the end of December 2019, CSCI was 64.7% owned by China Overseas Holdings Limited (COHL), which is in turn controlled by China State Construction Engineering Corporation Limited (CSCECL, A2 stable) -- a listed company 56.3% owned by China State Construction Engineering Corporation (CSCEC). CSCEC is 100% owned by the SASAC under the State Council of China.
The local market analyst for these ratings is Sue Su, +86 (106) 319-6505 .
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
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 entities 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.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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 www.moodys.com.
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
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