CSCEC Finance (Cayman) II Limited -- Moody's affirms China State Construction Engineering Corp's A2 ratings; outlook stable

Rating Action: Moody's affirms China State Construction Engineering Corp's A2 ratings; outlook stable

Global Credit Research - 29 Jul 2020

Hong Kong, July 29, 2020 -- Moody's Investors Service has affirmed the A2 issuer rating of China State Construction Engineering Corp Ltd (CSCECL) and the A2 senior unsecured ratings on the debt issued by CSCEC Finance (Cayman) I Limited and CSCEC Finance (Cayman) II Limited, and guaranteed by CSCECL.

The outlook on the ratings is stable.

"The affirmation of CSCECL's A2 ratings reflects our assessment that CSCECL's credit metrics will remain stable over the next one to two years, supported by its large construction order backlog, solid property business and prudent financial management," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

CSCECL's A2 issuer rating incorporates its standalone credit profile and a three-notch uplift based on Moody's expectation that the company will receive a high level of support from the Government of China (A1 stable) through its parent, China State Construction Engineering Corporation (CSCEC), in times of financial distress.

Moody's support assumption takes into consideration: (1) CSCECL's important role in undertaking urban development and infrastructure projects in China, (2) CSCEC's majority ownership of the company, (3) the fact that CSCECL accounts for over 95% of CSCEC's consolidated revenues and assets , and (4) the Chinese government's strong ability to provide support.

CSCECL's standalone credit profile mainly reflects (1) its large scale and leadership position in housing construction with good revenue visibility due to its large order backlog; (2) the solid performance of its property development business under China Overseas Land & Investment Limited (COLI, Baa1 stable); and (3) its prudent financial management through leverage control measures.

However, the company's standalone credit profile is constrained by (1) the cyclical nature of its property development business, which is facing tightening regulatory controls; (2) its involvement in infrastructure investments, which calls for larger funding support; and (3) the execution risks associated with its overseas expansion and infrastructure investments.

Moody's expects CSCECL's leverage -- as measured by adjusted debt/EBITDA -- will remain stable at around 4.6x-4.8x in the next one to two years despite the short-term disruptions caused by the coronavirus outbreak. This level of leverage is consistent with its standalone credit profile.

The rating also takes 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.

In terms of governance risks, the rating takes into account the fact that CSCECL is controlled, supervised and monitored by CSCEC, a 100% government-owned entity under the central government. As a listed company on the Shanghai Stock Exchange, CSCECL provides good disclosure of its businesses and financial performance. The company is led by an experienced management team with a solid track record of project execution.

The stable outlook incorporates Moody's expectations that over the next 12-18 months: (1) CSCECL's credit metrics will stay at levels appropriate for its standalone credit strength; and (2) the company's importance to the economy and role in the country, as well as the Chinese government's ability to provide support through its parent, will remain intact.

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

Moody's could upgrade CSCECL's ratings if its standalone credit profile improves and, at same time, the Chinese government's ability to provide support through CSCEC strengthens, which would be evidenced by an upgrade of China's sovereign rating.

The company's standalone credit profile could improve if it (1) successfully maintains the robust performance of its property development business, while balancing its exposure to infrastructure construction and minimizing execution risks; (2) maintains a prudent investment strategy when investing in infrastructure projects; and (3) improves its debt leverage.

Credit metrics indicative of an improvement in the standalone credit strength include CSCECL's adjusted debt/EBITDA remaining below 3.5x or adjusted EBITDA/interest staying above 7.0x on a sustained basis.

Moody's could downgrade CSCECL's ratings if the company's standalone credit profile is lowered because of a material deterioration in its business or financial profile, or there are signs of weakening support from its parent or the Chinese government.

CSCECL's standalone credit profile will be weakened if (1) it makes aggressive debt-funded investments in infrastructure projects, resulting in a deterioration in its financial profile; (2) a substantial decline in its new contracts causes its order backlog to fall below 1.5x of revenue; and (3) there are large cost overruns and project delays.

Credit metrics indicative of a deterioration in the standalone credit strength include CSCECL's adjusted debt/EBITDA rising above 5.0-5.5x and adjusted EBITDA/interest staying below 4.0x on a sustained basis.

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.

China State Construction Engineering Corp Ltd (CSCECL) is the largest construction company in China. It engages in the construction of residential and commercial buildings, infrastructure construction and investment, property development, and engineering design and survey. CSCECL undertakes construction projects mainly through eight construction bureaus in mainland China. It also covers Hong Kong SAR and Macau SAR through its Hong Kong-based subsidiaries, China Overseas Land & Investment Limited (COLI, Baa1 stable) and China State Construction International Holdings Limited (CSCI, Baa2 stable).

It was 56.3% controlled by China State Construction Engineering Corp (CSCEC) as of the end of 2019, which is in turn 100% owned by the State-owned Assets Supervision and Administration commission of the State Council of China. CSCECL accounted for over 95% of CSCEC's total assets and revenue in 2019.

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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