HONG KONG, 12 July 2024. CSPI Ratings has affirmed a global scale long-term issuer credit rating (LTICR) of BBB+’ to Ningbo Fenghua District Investment Group Co., Ltd. (NFDI), with a stable outlook. Concurrently, we withdraw the proposed issuance credit rating of “BBB+” in July 2023, as requested by the issuer.
NFDI is a core development and construction entity in the Fenghua district, the company’s main business includes infrastructure construction, land development, and real estate sales. The company's operations also extend to leasing, trade, security, human resources services, and other related businesses. The shareholders of NFDI are Ningbo Fenghua State-owned Administrative Center (NFSAC) and Zhejiang Financial Development Co., LTD., holding 90.1% and 9.9% of the shares of the company respectively, and the actual control is Fenghua State-owned Assets, and NFSAC is the de facto controller of the company. NFDI’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b-’ and our assessment that the Fenghua district government has an extremely strong willingness to provide external support to the company in the event of financial distress.
KEY RATING RATIONALES
The core executor of Fenghua district government’s blueprint for infrastructure construction and land development. NFDI holds a crucial position as a major urban construction entity and state-owned asset operator in the Fenghua district. Its primary responsibilities include infrastructure construction, settlement house construction and operation, and land development in the district. Moreover, the company extends its operations to encompass trade, security services, human resources, and leasing. Fenghua district stands as a significant industrial hub within Ningbo city, enjoying a prominent status in the industrial economy. Since it transitioned from a city (county-level) to a district in 2016, Fenghua district has witnessed a surge in investment demands for infrastructure development and urban renewal projects. As a result, NFDI has experienced rapid growth in its infrastructure construction business, consistently expanding its market presence. The company's business development exhibits commendable stability and sustainability. The positive trajectory of NFDI plays a pivotal role in advancing urban construction and fostering economic development within the Fenghua district. As such, we assess that in the event of financial distress, the Fenghua district government is willing to take necessary measures to support the company and ensure that the economic development of the region is not affected.
Long-standing track record of government support. As a company under the actual control of NFSAC, NFDI has benefited from various types of government subsidies, amounting to RMB203.4 million, RMB161.4 million, and RMB170.7million, respectively, in 2021, 2022 and 2023. Furthermore, the Fenghua District government actively provides direct financial support to NFDI through cash injections and asset transfers, reinforcing the company's operational capabilities and facilitating its growth trajectory. An exemplary illustration of this support can be observed in the year 2023. During this period, the company experienced a notable enhancement in its financial standing due to multiple forms of government assistance, including the gratuitous transfer of fixed assets, inflows of funds from special bonds, and equity transfers. Notably, the company's capital reserve witnessed a significant increase of RMB2.304 billion, signifying a substantial reinforcement of its overall asset base. These strategic initiatives undertaken by the Fenghua district government further solidify the company's position and lay a strong foundation for its continued development and success. The company's board of directors and senior management are appointed by the Fenghua district government, which we believe has a high degree of influence over the company's operations.
Ningbo city and Fenghua district’s robust creditworthiness with advanced economic progress. Ningbo is one of the cities with independent state plan in China, enjoying the provincial-level authority of economic and financial management. In 2023, Ningbo's GDP reached RMB1,645.3 billion, ranking 12th nationwide. Ningbo's GDP per capita in the same year stood at RMB170,363, very high in the country, indicating a high level of economic development. In addition, Ningbo is an important advanced manufacturing base and is the first pilot demonstration city of the manufacturing power strategy, with a fairly strong manufacturing foundation. Meanwhile, the Ningbo city government has maintained a moderate level of fiscal deficit in recent years. According to our calculations, the average budgetary balance-to-revenue ratio for the period of 2019-2023 in Ningbo city was -9.0%, indicating a relatively light fiscal deficit pressure on the government. As an important industrial base in Ningbo, Fenghua district also registered a high GDP per capita of RMB163,056 in 2023. In recent years, Fenghua district has accelerated the development of strategic industries such as new materials, high-end equipment, and next-generation information technology. The district has focused on building a new industrial system represented by new energy, new fashion, new equipment, new information technology, new health, and new materials. Additionally, according to our calculations, the Fenghua District government has maintained a healthy level of liquidity in its finances, enhancing its ability to withstand external pressures in the coming years.
Credit Weaknesses
High leverage. Throughout the years 2022-2023, the company's debt-to-total capitalisation ratios stood at 70.3% and 71.0% respectively. As of the end of 2023, the company's interest-bearing debt reached approximately RMB46.1 billion. This is primarily attributed to the company's involvement in major infrastructure construction projects, land development initiatives, and resettlement housing construction projects within the Fenghua district. Looking ahead, the company will continue to rely on additional borrowing to fund its ongoing projects, leading to a steady expansion of its debt scale. We anticipate that the company's debt-to-total capitalisation ratio will persist at a relatively high level of 70% or above. Moreover, in comparison to its debt scale, the company's EBITDA presents a relatively weak position, making it challenging to solely rely on EBITDA for debt repayment and interest obligations. The elevated leverage ratio poses certain pressures on the company's cash flow and repayment capacity.
Low operational efficiency and weak profitability. Influenced by its industry characteristics and business model, the company faces challenges in optimizing its operational processes. The protracted cash conversion cycle limits the company's ability to generate significant operating cash flow. Our analysis indicates that NFDI's average EBITDA profit margin for the period of 2022-2026 stands at 15.4%, which is considered within the industry average. However, when excluding government subsidies, the company's profit margin reveals a relatively weaker performance. This can be attributed to the company's involvement in infrastructure construction projects, which typically have longer construction periods and involve government entities and other state-owned enterprises as clients, resulting in a moderate overall gross profit margin. Furthermore, our calculations project an average return on capital of 0.6% for the period of 2022-2026, indicating a relatively modest overall profitability level.
RATING OUTLOOK
The Rating Outlook is Stable, which reflects our expectation that NFDI is able to maintain its strategic role in the development of the Fenghua district going forward.
We would consider a rating downgrade if 1) NFDI’s ties with the Fenghua district government loosen from the current level; 2) the fiscal strength of the Fenghua district government weakens substantially or its liquidity deteriorates tremendously; and/or 3) NFDI’s market position in Fenghua district’s construction and land development businesses declines substantially.
We would consider a rating upgrade if 1) the Fenghua district government’s fiscal revenue scale improves and the debt burden alleviates on a sustained basis; 2) NFDI’s importance to the Fenghua district government increases significantly; and/or 3) there is substantial improvement in NFDI’s leverage and financial profile.
ANALYSTS CONTACT
Primary Analyst
Jameson Zuo
+852 3615 8341
Secondary Analyst
Sherlock Liang
+86 755 2348 3690
sherlock.liang@cspi-ratings.com
Committee Chair
Larissa Wu
+852 3615 8317
larissa.wu@cspi-ratings.com
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 28 June 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)
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