HONG KONG, 12 July 2023. CSPI Ratings has affirmed the global scale long-term issuer credit rating (LTICR) of ‘BBB’ for Baoding Guokong Group Co., Ltd. (BDGK). We have also assigned an issuance final credit rating of 'BBB' to BDGK’s RMB1 billion 4.98% senior unsecured offshore notes due in 2027. 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.
BDGK, as a significant local state-owned enterprise in Baoding City, plays a crucial role in land development, infrastructure construction, affordable housing projects, water supply, heating, and other key sectors within the region. Additionally, it operates in real estate sales, merchandise sales, and property leasing domains. Baoding State-Owned Assets Supervision and Administration Commission (Baoding SASAC) holds a 100% equity stake in BDGK, serving as the company's controlling shareholder and actual controller. The issuer credit rating of BDGK is based on the ‘b’ Standalone Credit Profile (SACP) and our view that the Baoding City Government has extremely strong willingness to provide additional support to BDGK in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
Important Project Constructor and Urban Operator in Baoding City. BDGK is mainly responsible for land development, infrastructure construction, affordable housing construction, water supply, heating, and other businesses within Baoding City. It also operates in sectors such as real estate sales, commodity sales, and property leasing. The company has demonstrated significant competitiveness and strong regional franchise advantages in infrastructure construction and state-owned asset management sectors in Baoding City, ensuring the stability and continuity of its operations. Given BDGK's continued significant role in Baoding City's economic development and urban construction, we believe that the Baoding City Government is willing to take necessary measures to ensure the company’s sustainable development and provide necessary support in the event of financial distress.
Long track record of support from the Baoding City Government. As the largest municipal state-owned enterprise in Baoding City, BDGK maintains close ties with the Baoding City Government. The company has received substantial support from the government in forms of capital injection, asset allocation, and fiscal subsidies, to support the continuous expansion of the company's business scale and asset strength. From 2020 to 2023, with the support of the Baoding City Government, BDGK progressively integrated several high-quality state-owned enterprises in the region into the company. Additionally, the company has received various government subsidies of RMB250 million, RMB270 million, and RMB160 million in 2021, 2022, and 2023, respectively. We believe that with the advancement of key projects undertaken by the company in the future, the Baoding City Government will continue to support the company. On the other hand, both the board of directors and senior management of BDGK are endorsed by the Baoding City Government and appointed by the Baoding SASAC. Moreover, the Baoding City Government closely participates in the company's investment and operational strategies, exerting a high level of influence over its operations.
Favourable economic foundation and stable credit profile of Baoding City. As a key prefecture-level city within Hebei Province, it holds a prominent position as one of the central cities in the Beijing-Tianjin-Hebei region. Strategically located in the central-western part of Hebei Province, Baoding plays a vital role as the strategic hinterland for the Xiong'an New Area, contributing significantly to the Beijing-Tianjin-Hebei integration strategy. In recent years, Baoding City has witnessed a steady expansion of its economic scale, reflecting a positive growth trajectory. In 2023, the city's GDP reached RMB401.2 billion, accounting for approximately 9.1% of Hebei Province's total GDP and securing the fifth position in the provincial ranking. Baoding City has established itself as a major manufacturing hub, with a focus on automotive and parts manufacturing as well as the new energy industry. Moreover, it boasts 27 distinctive county-level industrial clusters, further diversifying its industrial landscape. During the first quarter of 2024, Baoding City's economic performance exhibited resilience, with a GDP of RMB99.8 billion and a growth rate of 5.3%. Consequently, we hold an optimistic outlook for Baoding City's future economic growth prospects. The favourable economic development trajectory not only contributes to Baoding City's strong fiscal position and healthy liquidity but also supports its maintenance of a stable creditworthiness.
Credit Weaknesses
High financial leverage. We have seen a rapid growth trend in BDGK’s debt scale over the past few years. The company had a total interest-bearing debt of RMB48.5 billion by the end of 2023, which is expected to grow further due to business expansion and the continuation of ongoing projects. We project the company's debt scale to further increase to meet its funding requirements. The company’s gross debt-to-total capitalisation ratio has increased to 65.6% in 2023 from 36.1% in 2020. Taking into account the continued expansion of the company's asset scale and further asset injection from the Baoding City Government, we anticipate that this ratio will remain above 60% in the coming years, but within a relatively manageable range. In addition, BDGK’s EBITDA is relatively thin relatively to its debt scale. The average debt-to-EBITDA ratio and EBITDA interest coverage ratio for the company between 2022 and 2026 are estimated to be 102.9x and 0.2x, respectively. Overall, we expect the company's financial leverage to remain high in the coming years, exerting certain pressure on its cash flow and solvency.
Low operating efficiency and weak profitability. The low operating efficiency is primarily due to the company's industry and business model, resulting in a long cash conversion cycle, as evidenced by its 39 days of accounts receivable turnover and 3,046 days of inventory turnover in 2023. Furthermore, the Company's average EBITDA margin for 2022-2026 is estimated at 10.1% after accounting for government subsidies, which is a reasonable margin level. However, after excluding government subsidies, the margin is relatively low. Because the majority of the company's land development, infrastructure construction, and affordable housing construction businesses are guided by the Baoding City Government and are of a public welfare nature, the overall gross profit margin is not high. We estimate the company's average return on capital to be around 0.5% for the period 2022-2026, indicating weak overall profitability.
RATING OUTLOOK
The stable outlook for BDGK reflects our expectation that the credit profile of the Baoding City Government will remain stable and that BDGK is able to retain its strategic role in the development of the Baoding City.
We would consider a rating downgrade if 1) BDGK’s ties with the Baoding City Government loosen from current level; 2) the fiscal strength of the Baoding City Government weakens substantially or its debt burden exacerbates tremendously; and/or 3) BDGK’s business connection with the Baoding City Government weakens, and its market position in the infrastructure construction and public service sectors in Baoding City declines significantly.
We would consider a rating upgrade if 1) The Baoding City Government’s economic and fiscal revenue scale improve on a sustained basis; and/or 2) BDGK’s importance to the Baoding City Government increases significantly.
ANALYSTS CONTACT
Primary Analyst
Jameson Zuo
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
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: 10 July 2024
Additional information is available on www.cspi-ratings.com
Related Criteria
General Corporate Rating Criteria (15 March 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
Government-Related Entities Rating Criteria (31 August 2018)
Corporate Issuance Rating Criteria (11 March 2022)
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