HONG KONG, 17 June 2024. CSPI Ratings has affirmed the global scale long-term issuer credit rating (LTICR) of ‘BB+’ for Mudanjiang City Investment Group Company Limited (MDJCIG). The outlook is stable. MDJCIG’s issuer credit rating is based on a standalone credit profile of ‘b-’ and our assessment that its parent, Mudanjiang State-owned Assets Investment Holdings Company Limited (MDJSAI), has an almost certain willingness to provide extraordinary support in the event of financial distress.
MDJCIG is the primary entity responsible for infrastructure and affordable housing construction in Mudanjiang. It undertakes the city's major municipal infrastructure, shantytown renovation, and affordable housing projects. MDJSAI is the controlling shareholder of MDJCIG, holding 86.65% equity of the company. China Development Bank's Development Fund Co., Ltd. and China Agricultural Development Fund Co., Ltd. hold 6.88% and 6.46% stakes, respectively. Mudanjiang State-owned Assets Supervision and Administration Office (MDJSASAO) is the actual controller of the company.
KEY RATING RATIONALES
Credit Strengths
Executor of Mudanjiang’s urban development and construction blueprint. MDJCIG is the primary entity responsible for the city's urban infrastructure construction, undertaking numerous municipal infrastructure and affordable housing projects, accounting for over 80% of the local affordable housing construction market share. It also takes on key projects like shantytown renovation, mining restoration, and parking lot construction, which help enhance the city's overall functionality. We believe the company is deeply involved in the city's economic development and urbanisation, with its core businesses demonstrating stable and sustainable growth prospects. Given MDJCIG’s continued importance in Mudanjiang's urban construction, MDJSAI and the Mudanjiang municipal government are willing to take necessary measures to ensure the company's sustainable development in the event of financial distress, in order to ensure the regional economic development is not impacted.
Long-standing track record of government support to the company. As the core subsidiary of MDJSAI and the primary operator of the infrastructure construction segment, MDJCIG maintains close ties with the Mudanjiang municipal government through its parent company. Over the long term, the company has received strong support from the Mudanjiang government in terms of capital injections, asset allocations, and financial subsidies. In 2021, 2022, and 2023, MDJCIG received government subsidies of various types, amounting to RMB961 million, RMB0.17 million and RMB60 million, respectively. Moreover, MDJCIG also received capital injections and land asset allocations from the Mudanjiang government to strengthen its asset strength. Considering the company's irreplaceable role in Mudanjiang's infrastructure construction, we believe that the Mudanjiang government will continue to support MDJCIG, through MDJSAI, to facilitate the city’s land development and urbanisation progress.
Mudanjiang’s stable creditworthiness with higher-level government support. Located in the southeast of Heilongjiang Province, Mudanjiang sits at the heart of the ‘Golden Triangle’ region shared by China, Russia, and South Korea, serving as an important regional centre in northeast China. Owing to its advantageous geographical position, Mudanjiang's economy has achieved rapid growth. In 2023, Mudanjiang's GDP growth rate was 4.2%, the fastest among cities in Heilongjiang Province. This is primarily due to the rebound in the tourism industry, and the city's promotion of new businesses such as e-commerce and digital economy. As a result, we expect Mudanjiang's future economic growth to remain at a relatively high level. In addition, higher-level governments have been giving consistent and strong fiscal support to Mudanjiang and this significantly augments the city’s revenue scope and sustains a balanced fiscal budget. As Mudanjiang's economy continues to grow, its budgetary revenue growth is expected to remain robust in the future.
Credit Weaknesses
Relatively high financial leverage. As of the end of 2023, MDJCIG had an interest-bearing debt of around RMB6.5 billion. We assessed the company's gross debt-to-total capitalisation ratio to be 30.9% in 2023, and we expect this ratio to remain around 30% in the next few years. In addition, the company's EBITDA is relatively weak compared to the debt scale. We estimate that the company's average debt-to-EBITDA ratio and EBITDA interest coverage ratio will be 31.5x and 0.8x respectively between 2022 and 2026. Considering that MDJCIG continues to undertake the major infrastructure construction projects in Mudanjiang, the company will still have significant capital requirements in the next few years to support its project investments. We believe that the company's leverage ratio will remain at a relatively high level in the next few years, which will put certain pressure on the company's cash flow and debt servicing ability.
Low profitability and tight liquidity. As MDJCIG is mainly engaged in infrastructure construction and engineering business, its profitability level is not high and its turnover efficiency is relatively low due to the industry and business model. After considering government subsidies, we estimate that the company's EBITDA profit margin was 13.2% in 2023. Besides, the company's inventory consists of a large amount of investment costs from infrastructure projects, and the collection period of such businesses is generally long, resulting in low operating efficiency of the company. Based on our calculations, MDJCIG 's cash conversion cycle was approximately 2,722 days in 2023, leading to leads to weak cash flows from operation for the company. We assess MDJCIG’s short-term liquidity to be tight, with its 12-month forward cash flow liquidity ratio of 0.5x.
RATING OUTLOOK
The stable outlook for MDJCIG reflects our expectation that the credit profile of the Mudanjiang municipal government and MDJSAI will remain stable, and MDJCIG is able to maintain its strategic role in the development of Mudanjiang going forward.
We would consider a rating downgrade if 1) MDJCIG’s ties with its parent MDJSAI loosen from the current level; 2) the fiscal strengths of the Mudanjiang municipal government weaken substantially or its debt burden exacerbates tremendously; and/or 3) MDJCIG’s business connection with Mudanjiang municipal government weakens, and its market position in the construction sector in the Mudanjiang city declines significantly.
We would consider a rating upgrade if 1) the Mudanjiang municipal government’s economic and fiscal revenue scale improves on a sustained basis; and/or 2) MDJSAI’s importance to the Mudanjiang municipal government increases significantly.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
Committee Chair
Larissa Wu, Ph.D.
+852 3615 8317
larissa.wu@cspi-ratings.com
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 31 May 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)
DISCLAIMER
Solicited ratings – disclosed and results not affected
CSPI Credit Ratings Company Limited (“CSPI Ratings”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.cspi-ratings.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.
All credit ratings and reports are subject to disclaimers and limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.
CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.
For the purpose of the rating process, the Company obtains sufficient quality factual information from sources which are believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process. The Company had access to the accounts and other relevant internal documents of the rated entity or its related party. The Company has examined the quality of information used in the rating process in accordance with established process and it is satisfied with the quality of information used.
Users of the Company’s credit ratings shall refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.
The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.
The Company may receive compensation for its credit ratings, normally from issuers, underwriters or obligors. The information about the Company’s fee schedule can be provided upon the request.
The rated entity participated in the rating process. The credit rating has been disclosed to the rated entity or to its related party and, following such disclosure, the credit rating result has not been amended before being issued.
The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.
The Company’s credit ratings and reports are not intended for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubts, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.
In the event of any dispute arising out of or in relation to our credit ratings and reports, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.
Copyright © 2024 by CSPI Credit Ratings Company Limited All rights reserved.