HONG KONG, 9 July 2024. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Zhangzhou City Longhai District State-owned Assets Investment Management Co., Ltd (LHGT), with a stable outlook. The company is an important infrastructure construction and state-owned asset management entity in Longhai district, mainly responsible for municipal infrastructure and affordable housing construction. It also engaged in water supply, sewage treatment, merchandise sales, and other businesses.
The company is wholly owned and controlled by the Longhai District Finance Bureau. LHGT’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b-’ and our assessment that the Longhai government has an extremely strong willingness to provide external support to the company in the event of financial distress.
We have also assigned an issuance credit rating of 'BBB-' to LHGT’s proposed senior unsecured offshore notes. The notes, which constitute direct and unconditional obligations of the issuer, are at all times ranked pari passu among themselves and at least pari passu with all other present and future unsecured obligations of the issuer. The outlook is stable. The proposed issuance rating is provisional and subject to our review of the final offering documents.
KEY RATING RATIONALES
Credit Strengths
Key integrated investment and financing platform and main state-owned asset operation entity in Longhai District. As a wholly state-owned enterprise in Longhai District, LHGT mainly undertakes municipal infrastructure and affordable housing construction, with a competitive advantage in the region. It serves as the primary vehicle for raising and allocating funds for major urban construction projects in Longhai District. LHGT also engages in diverse businesses, including labour dispatch, engineering inspection, grain sales and purchases, hot spring development, property and urban operations, and transportation. Given that the company will continue to play a key role in the economic development of Longhai District in the future, we believe that the business stability and sustainability of the company are robust, and the future vision of the company’s development is promising. We also believe that in the event of financial distress, the Longhai government is willing to take the necessary measures to support the company and ensure its economic development remains unaffected.
Track record of continued and robust support from the Longhai government. The Longhai District Finance Bureau is the actual controller and sole shareholder of LHGT. The company's senior management is appointed by and evaluated by the Longhai government, which exerts significant control and influence over the company's operations. The company has maintained a close and positive relationship with the Longhai government, receiving substantial support in forms of asset allocation, capital injection, and financial subsidies. In 2023, the company received capital funds of RMB117 million for the Shima Street renovation project, RMB717 million in assets for guaranteed delivery housing projects from the Housing and Urban-Rural Development Bureau, and RMB304 million in digital city smart parking franchise rights, significantly enhancing the company's capital strength. As of the end of 2023, the company’s consolidated capital reserve was RMB7.18 billion. In 2021, 2022, and 2023, the company received government subsidies of RMB99.6 million, RMB122.9 million, and RMB130.6 million respectively. Given that the company continues to play an important role in infrastructure construction in Longhai District, we believe that with the advancement of key projects undertaken by the company in the future, the Longhai government will continue to provide necessary support to the company.
Strong economic fundamentals of Longhai District, and a stable credit profile of the Longhai government. Zhangzhou has established a solid and diversified foundation for industrial development, and experienced robust economic development in recent years, with a focus on developing a green economy. In 2023, Zhangzhou's gross domestic product (GDP) reached RMB572.84 billion, growing by 5.9% year-on-year at constant prices, outpacing the national and provincial averages by 0.7% and 1.4%, respectively. We estimate that Zhangzhou City will maintain a growth rate of over 6% in the next two years, indicating a favourable economic outlook. In 2023, Longhai District's industrial economy showed steady growth, with industrial added value increasing by 4.7% and fixed asset investment rising by 10.3%, significantly supporting regional economic development. We estimate that the per capita GDP in the district for the year was RMB105,485, higher than the national average. In recent years, Longhai District has focused on building a 4+4 industrial system, which emphasizes four pillar industries: healthy food, equipment manufacturing, new energy, and construction, and four advantageous industries: specialized modern agriculture, marine economy, trade logistics, and cultural tourism and wellness. Although the budget revenue scale of Longhai District is relatively small, the district government has effectively managed revenue and expenditure balances in recent years. In 2023, Longhai District achieved a budgetary balance-to-revenueratio of -5.1%, reflecting a lower deficit level.
Credit Weaknesses
Relatively high financial leverage. As of the end of 2023, the company's total interest-bearing debt amounted to RMB9.6 billion, with a year-on-year increase of 9.2%. As the company undertakes the major infrastructure projects in Longhai District and plans to increase investment in self-operated projects such as industrial parks and smart parking, it will continue to rely on further borrowing to meet its funding needs in the coming years, so the debt level is expected to steadily increase. We project that the company's debt-to-total capitalization ratio will increase from 51.5% in 2023 to around 55% in the next few years. Additionally, the company has a relatively weaker EBITDA compared to its debt scale. We calculate the company's debt-to-EBITDA ratio for 2023 as 33.3x and the EBITDA interest coverage ratio as 0.5x.
Low operating efficiency and tight liquidity. Due to the nature of its industry and business model, the company's operational efficiency is low. In 2023, the company had an accounts receivable turnover of 185.7 days and an inventory turnover of 1,636.8 days. The company's inventory primarily consists of development costs related to infrastructure construction. The long construction and payment cycles of such projects result in an extended cash conversion cycle, leading to relatively weak liquidity for the company. We predict the company’s cash flow liquidity ratio and quick ratio in the next 12 months (2024) to be 0.8x and 0.4x, respectively, indicating its insufficient liquidity in the near term.
RATING OUTLOOK
The stable outlook for LHGT reflects our expectation that the Longhai government’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of Longhai going forward.
We would consider a rating downgrade if 1) LHGT’s ties with the Longhai District government loosen from the current level; 2) the liquidity of the Longhai District government weakens substantially or its fiscal balance worsens tremendously; 3) LHGT’s business connection with the Longhai District government weakens and its market position in the construction sector in the Longhai District declines significantly.
We would consider a rating upgrade if 1) the Longhai District government’s fiscal revenue scale expands and its debt burden alleviates on a sustained basis; and 2) LHGT’s importance to the Longhai District government increases significantly.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo
+852 3615 8341
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Larissa Wu
+852 3615 8317
larissa.wu@cspi-ratings.com
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 8 July 2024
Additional information is available on www.cspi-ratings.com
Related Criteria
General Corporate Rating Criteria (15 March 2018)
Government-Related Entities Rating Criteria (31August 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
Corporate Issuance Rating Criteria (11 March 2022)
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