The company serves as the core entity responsible for the construction of key infrastructure projects and the management of industrial parks in the Guixi Economic Development Zone (GEDZ). Its primary responsibilities encompass the construction of crucial infrastructure projects and trading businesses within the GEDZ. The shareholder of the company is the Guixi Economic Development Zone Administrative Committee (GEDZAC), while the ultimate controlling entity is the Guixi City government. GXXI’s issuer credit rating comprises a standalone credit profile (SACP) of ‘b-’ and our assessment of the extremely strong willingness of extraordinary support from the Guixi City government in the event of financial distress.
We have also assigned the issuance credit rating of 'BBB-' to GXXI’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 outlook is stable. It is important to note that this rating is preliminary and is subject to our thorough review of the final issuance documentation.
KEY RATING RATIONALES
Credit Strengths
The company holds a prominent and strategic position within Guixi City. As the foremost state-owned enterprise responsible for infrastructure construction and the development and management of industrial parks in GEDZ, GXXI has successfully established a diversified business portfolio with a primary focus on construction and copper trading. GEDZ, as a provincially designated key economic development area, plays a pivotal role in the economic landscape of Guixi City. It significantly contributes to the city's fiscal revenues and operates under the integrated management system implemented by the Guixi City government, indicating favorable growth prospects. Based on our evaluation, as a core state-owned enterprise within the region, GXXI currently enjoys a robust pipeline of ongoing and reserved projects, while continuously expanding its copper trading operations. It is poised to play a vital role in the future economic development of Guixi City, with substantial opportunities for business expansion. Moreover, we hold the opinion that in the event of financial challenges, the Guixi City government is willing to undertake necessary measures to provide support, ensuring the uninterrupted progress of the region's economic development.
The company has consistently enjoyed strong support from the Guixi City government. In recent years, the GEDZAC has demonstrated its commitment by providing substantial support to GXXI through various means such as capital injections, equity transfers, and financial subsidies. Since its inception, the company has directly benefited from the infusion of diverse assets by the GEDZAC, significantly bolstering its capital strength. As of 2023, the company's capital reserves have reached an impressive amount of RMB13.1 billion, with net assets totaling RMB14.4 billion. Furthermore, the company has received government subsidies of RMB61.9 million in 2022 and RMB46.6 million in 2023, effectively enhancing its profitability. These subsidies have played a crucial role in improving the company's financial performance. Looking ahead, we believe that as the company continues to pursue further consolidation, expansion, and the successful execution of key projects, the Guixi City government will remain committed to providing essential support to ensure the company's continued growth and success.
Guixi City possesses a robust industrial foundation and maintains a stable credit profile. In recent years, propelled by the rapid growth of its copper industry, the city has achieved commendable economic expansion. From 2018 to 2023, Guixi City exhibited an average annual GDP growth rate of 6.7%, surpassing the national average. This upward trajectory can be attributed to the steady development of the copper sector and the emergence of new industries such as intelligent manufacturing, digital economy, and green lighting. Notably, in 2023, Guixi City recorded a regional GDP of RMB648 billion, with a per capita GDP of RMB119,594, significantly surpassing the national average. These figures reflect the city's advantageous resource endowment and robust industrial foundation. Furthermore, Guixi City demonstrates effective fiscal management, maintaining a prudent fiscal deficit level. Thanks to its stable economic progress, the city has experienced favorable growth in general public budgetary revenue and government fund revenue in recent years. Based on our estimation, the average budgetary balance-to-revenue ratio for Guixi City during the period of 2022-2026 is projected to be approximately -19.3%, indicating a manageable fiscal deficit burden. Looking ahead, we anticipate that the city will sustain a healthy fiscal equilibrium and maintain overall credit stability in the coming three years.
Credit Weaknesses
The company has experienced a notable acceleration in its overall debt growth. Since its establishment, GXXI has embarked on an ambitious external financing strategy, resulting in a rapid expansion of its borrowing scale starting in 2021. Based on our analysis, we estimate the company's interest-bearing debt to reach approximately RMB6.3 billion by the end of 2023. As a consequence, the calculated debt-to-total capitalization ratio stands at 31.3%, indicating a relatively moderate level of indebtedness. However, we anticipate that the company's interest-bearing debt will continue to increase swiftly due to ongoing business expansion and sustained investment in ongoing projects. Moreover, it is worth noting that compared with its debt, GXXI's EBITDA scale remains relatively thin. Our forecasts indicate an average debt/EBITDA ratio of 33.8x and an EBITDA interest coverage ratio of 0.7x for the period from 2022 to 2026. Going forward, the company's leverage is expected to rise steadily in the coming years, potentially placing some pressure on its cash flow and repayment capacity.
The company faces challenges in terms of its liquidity and profitability. Due to the nature of its industry and business model, GXXI experiences slower cash turnover in its construction business. The company currently has a significant number of ongoing and planned projects, leading to a continuous demand for project funding. Additionally, there is a substantial short-term debt repayment requirement, creating notable pressure on the company's liquidity over the next two years. Our analysis predicts a cash flow liquidity ratio of 0.8x for the upcoming 12 months, indicating a relatively tight liquidity position. Furthermore, we estimate an average EBITDA margin of 2.5% for GXXI during the period from 2022 to 2026. The company’s profitability level is relatively low, particularly after excluding government subsidies. This is attributed to the company's construction and copper trading businesses with low overall profit margins. Additionally, our analysis indicates an average return on invested capital of approximately 1.4% for the period from 2022 to 2026, suggesting a comparatively lower level of profitability considering the capital invested.
RATINGS OUTLOOK
The GXXI rating is supported by its strong relationship with the Guixi City government and the Guixi City government’s stable credit profile over the next three years. GXXI’s rating is constrained by its high leverage and tight liquidity.
We would consider downgrading GXXI’s issuer credit rating if 1) GXXI’s ties with the GXXI City government loosen from the current level; 2) the GXXI City government’s liquidity weakens substantially or its budgetary revenue decreases tremendously; 3) GXXI’s business connection with the GXXI City government weakens, and its market position in the infrastructure construction sector in GXXI City declines significantly.
We would consider upgrading GXXI’s issuer credit rating if 1) the GXXI City government’s fiscal revenue scale improves and its debt burden ameliorates on a sustained basis; 2) the company’s importance to the GXXI City government increases significantly.
Note: The above content is the English translation of the Chinese press release. In case of any discrepancies, the Chinese version shall prevail.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
Committee Chair
Larissa Wu，Ph.D. FRM
+852 3615 8317
larissa.wu@cspi-ratings.com
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 25 April 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)
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.
This credit rating concerns newly issued debt securities or preferred securities and the Company is rating such securities for the first time.
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.