HONG KONG, 26 August 2024. CSPI ratings has affirmed the global scale long-term issuer credit rating (LTICR) of ‘BBB-’ for Sichuan Xinyao Industrial Integration Industry Investment & Development Group Co., Ltd. (XYG). We have also affirmed the issuance credit rating of 'BBB-' for XYG’s proposed senior unsecured offshore bonds. The bonds, 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 proposed issuance rating is provisional and subject to our review of the final offering documents. The outlook is stable.
XYG is the most important construction and assets operation entity in the Mianyang Economic and Technological Development Zone (METDZ). The company is responsible for infrastructure construction, housing development, and land consolidation within the region, and is also involved in merchandise sales, assets operation, industrial investment, and other business. The company is ultimately owned and controlled by the METDZ Management Committee. XYG’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b-’ and our assessment of the extremely strong willingness of extraordinary support from the METDZ government in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
Primary infrastructure executor and assets operator in METDZ. XYG is mainly responsible for municipal infrastructure construction, affordable housing construction, and land consolidation projects. Moreover, the company engages in industrial investment and promotion in the region. METDZ is a national economic and technological development zone, which plays a prominent role in the development strategy of Mianyang City. We believe the business stability and sustainability of the company are robust, and the future vision of the company’s development is promising since it has been a major participant in municipal construction and urbanisation in the METDZ. Therefore, we believe that the government is willing to take the necessary measures to ensure the sustainable development of XYG and ensure that it will not be affected in the event of financial distress.
Track record of support from the METDZ government. As an important local state-owned enterprise within the METDZ, XYG maintains close ties with the METDZ government. Since its establishment, the company has received strong support from the METDZ government in the form of capital injections, asset transfers, and fiscal subsidies, to support the operation of its businesses. In 2023, the METDZ government increased its capital investment in the company to RMB2.5 billion and injected high-quality assets such as sand and stone resource operating rights and equity in other state-owned enterprises, thereby strengthening the company's capital strength. Furthermore, the company has received stable government subsidies of various types over the past three years. We believe that as long as the company continues to play a crucial role in the development of the METDZ, the local government will provide necessary support to the company. Moreover, given that the company’s board of directors and senior management are appointed by the METDZ government, which also closely participates in guiding the company’s investment and operational strategies, we see a high degree of government control over the company’s operations.
Strong economic fundamentals of Mianyang, and favourable economic prospects of the METDZ. Mianyang is the second-largest economy in Sichuan Province, with a strong economic growth momentum and ranking among the top in the province. In 2023, the city's GDP was RMB403.9 billion, with a GDP per capita of RMB82,329, surpassing the provincial average by 15%. Notably, Mianyang has established thriving industrial clusters, including an RMB150-billion electronic information industry, an RMB80-billion advanced materials industry, an RMB60-billion food and beverage industry, and an RMB50-billion equipment manufacturing industry. The METDZ is a national-level economic development zone, an outstanding industrial park, as well as a new industrial demonstration base in Sichuan Province. In 2023, the METDZ’s GDP grew by 9.8%, outperforming the province and the city by 3.8 and 1.8 percentage points, respectively, indicating a rapid growth trajectory. In the first half of 2024, the economic growth in the METDZ maintained a rapid pace, with a GDP growth of 9.6% and a 11.0% increase in the total industrial output value of enterprises above the designated size. Overall, the solid industrial foundation provides a strong basis for the favourable economic prospects of Mianyang City and the METDZ, which in turn creates a favourable external environment for the company's development.
Credit Weaknesses
High Leverage. As of the end of 2023, XYG had an interesting-bearing debt of RMB9.1 billion. We calculated that the company’s gross debt-to-total capitalization ratio decreased from 57.4% in 2022 to 42.7% in 2023, primarily due to the massive asset injections during the year. Given the company’s role in major construction projects within the region, as well as plans to expand its merchandise sales and investment sectors, it will still need to rely on further borrowings to meet its funding needs in the coming years, thus the scale of debt will further balloon. Besides, as compared with its debt scale, the company’s EBITDA has been rather thin. Based on our calculations, the company’s debt-to-EBITDA ratio and EBITDA interest coverage ratio for the 2022-2026 period are 16.7x and 0.9x, respectively, indicating its relatively weak debt servicing ability. We expect the company to maintain a high leverage in the foreseeable future, which poses challenges to its cash flow and solvency.
Low operating efficiency and tight liquidity. The company's operating efficiency is relatively low due to its industry and business model. The company's inventory consists of significant development costs related to infrastructure construction and land consolidation projects, which have longer construction and return cycles, leading to low turnover efficiency for the company. Based on our calculations, the company's accounts receivable turnover days and inventory turnover days were 400 days and 1,216 days, respectively, in 2023. Additionally, the company's operating cash flow is relatively weak, which is insufficient to support its debt obligations. Considering the company's projected quick ratio and cash flow liquidity ratio of 0.8x and 0.3x, respectively, in the next 12 months, we assess its short-term debt servicing ability to be vulnerable. We estimate the company's cash outflows to be approximately RMB4.2 billion in 2025, primarily for short-term debt repayment and interest expenses. Overall, considering the company's undrawn bank facilities and future cash inflows, we believe that the company's liquidity position is relatively tight.
RATINGS OUTLOOK
The stable outlook for XYG reflects our expectation that the credit profile of the METDZ government will remain stable and that XYG is able to retain its strategic role in the development of the METDZ going forward.
We would consider downgrading XYG’s issuer credit rating if 1) XYG’s ties with the METDZ government loosen from the current level; 2) METDZ’s economic growth or budgetary revenue growth declines sharply and its liquidity deteriorates substantially; 3) XYG’s business connection with the METDZ government weakens, and its market position in the infrastructure construction and state-owned asset management sectors in METDZ declines significantly.
We would consider upgrading XYG’s issuer credit rating if 1) METDZ’s economic scale or budgetary revenue scale increases materially and its debt burden decreases substantially; 2) the company’s importance to the METDZ government increases significantly.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
Committee Chair
Larissa Wu
+852 3615 8317
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 23 August 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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