HONG KONG, 9 July 2024. CSPI Ratings has affirmed a global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Ruichang State-Owned Investment Holding Group Co., Ltd.(RCSIH), with a stable outlook. RCSIH’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b+’ and our assessment that the Ruichang government has an extremely strong willingness to provide external support to the company in the event of financial distress.

The company is an important infrastructure construction and land consolidation development platform in Ruichang city. It carries out essential responsibilities such as infrastructure construction, land development, and the state-owned asset management and operation within the city. The company also engages in trading business, property management, and labor dispatch services. Ruichang State-owned Assets Affairs Center (RSAAC) holds a 100% stake in RCSIH and is regarded as the company’s controlling shareholder and ultimate controller.

KEY RATING RATIONALES

Credit Strengths
Key entity in the infrastructure construction and state-owned asset operation in Ruichang City. As the major operation of state-owned asset in Ruichang City, the company is primarily responsible for infrastructure construction, land development, and the state-owned asset management within the city. Given that the company will continue to play a key role in the economic development of Ruichang City in the future, we believe that the business stability and sustainability of the company are robust, showcasing promising prospects for future expansion. We also assess that in the event of financial distress, the government is willing to provide essential support to ensure the regional economic development unaffected.

Track record of continued and robust support from the Ruichang government. RSAAC holds 100% equity in RCSIH, acting as the company's controlling shareholder and ultimate controller. The company's senior management is appointed by and evaluated by the Ruichang government, which exerts significant control and influence over the company's operations. The company has maintained a close and positive relationship with the Ruichang government, receiving substantial support in forms of asset allocation, capital injection, and financial subsidies. In 2023, the Ruichang government transferred 100% equity of Ruichang Saihu Agricultural Investment Development Co., Ltd. and 100% equity of Ruichang Qinshan Cultural Tourism Investment Co., Ltd. to the company. As at end of 2023, the company's capital reserve increased to RMB25.4 billion from RMB7.3 billion. The company also received capital contribution of RMB150.0 million from shareholders, increasing its paid-in capital to RMB1.3 billion from RMB1.1 billion, significantly enhancing its capital strength. During 2022 and 2023, the company received various government subsidies amounting to RMB137.7 million and RMB183.7 million, respectively, improving the company's profitability. We believe that with the advancement of key projects undertaken by the company in the future, the Ruichang government will continue to provide the necessary support to the company.

Strong economic fundamentals of Jiujiang City, and stable credit profile of Ruichang government. Jiujiang, a prefecture-level city in Jiangxi Province, is recognized as one of China's Top 100 Cities and a National Type II Large City. In 2023, Jiujiang once again enlisted among the Top 100 Cities for Digital Economy Development in China, leading the province in comprehensive industrial digitalization development. The city’s industrial tax revenue amounted to RMB24.9 billion, ranking second in the province, with industrial value-added tax growing by 25.8%. Jiujiang city saw a net increase of 223 large-scale industrial enterprises, and 18 enterprises were listed among the province's Top 100 Enterprises. Ruichang city, a county-level city under the jurisdiction of Jiujiang, is an important industrial base within the region, highlighting its relative significance in both Jiujiang and Jiangxi Province. In 2023, Ruichang's GDP per capita was RMB75,283.0, slightly below the average for Jiujiang and the national level. Ruichang focuses on three main industries: optoelectronic information, new energy and new materials, and wood products and furniture. In recent years, Ruichang's budgetary revenue has grown rapidly, with a moderate fiscal deficit level and healthy liquidity. However, the city's overall economic scale and budget revenue are relatively small, and it faces higher debt pressure.

Credit Weaknesses

Low operating efficiency and weak profitability. The company's operating efficiency is relatively low due to the nature of its industry and business model. In 2023, the company had an accounts receivable turnover of 512.6 days and an inventory turnover of 2,282.2 days. The company's inventory primarily consists of development costs related to infrastructure construction, resulting in a lengthy construction and payment cycle that reduces its turnover efficiency. Moreover, the company’s profit margin from the infrastructure construction and trading business is thin, and the income generated from the tourism resources transferred to the company in 2023 may arise uncertainty. Considering the government subsidies, we estimate a weighted average return on invested capital of 0.6% for the period from 2022 to 2026, indicating a weak profitability for the company.

High financial leverage. As of the end of 2023, the company's total interest-bearing debt amounted to RMB10.6 billion, accounting for 55.6% of the total liabilities at the year end. As the company is responsible for major infrastructure projects in Ruichang City, it will rely on further borrowing in the coming years to meet its funding requirements, thus the debt scale is expected to steadily increase. We predict that the company's debt-to-capital ratio will increase from 34.6% in 2023 to 37.1% in 2026. Furthermore, the company's EBITDA relative to its debt level is relatively small. We calculate the company's debt/EBITDA ratio for 2023 as 52.0x and its EBITDA interest coverage ratio as 0.4x.

RATING OUTLOOK

The stable outlook for RCSIH reflects our expectation that the Ruichang government’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of Ruichang going forward.

We would consider a rating downgrade if 1) RCSIH’s ties with the Ruichang government loosen from current level; 2) Ruichang’s economy slows down considerably or its debt burden worsens substantially; and/or 3) RCSIH’s market position in the infrastructure construction sector and state-owned asset operation in Ruichang city declines significantly.

We would consider a rating upgrade if 1) the Ruichang government’s economy and fiscal revenue scale expand on a sustained basis; 2) RCSIH’s importance to the Ruichang government increases significantly; and/or 3) the substantial improvement in RCSIH’s leverage and financial profile.

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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