HONG KONG, 30 October 2023. CSPI Ratings has assigned a global-scale long-term issuer credit rating (LTICR) of ‘BBB’ to Jinan Tianqiao Industry Development Group Co., Ltd. (JTID) with a stable outlook. Following a period of consolidation, JTID has successfully established itself as a key player in the infrastructure construction and land development sectors within Tianqiao District, Jinan City. In addition to its core activities, the company has diversified its business portfolio to include property management, building materials trading, and industrial park development. Notably, the company assumes a vital role in primary land development, construction projects, and the revitalization of old residential areas in the southern region of the Yellow River, underscoring its strong regional focus and prominent market position. Its robust project pipeline ensures a steady flow of opportunities for continued growth in its public service businesses. Moreover, the company is actively engaged in the construction of industrial park projects, exemplified by the Shandong (Jinan) Pre-made Food Industrial Park, which is anticipated to yield rental income and operational revenues in the foreseeable future. The shareholder and actual controller of the company is the Tianqiao District Finance Bureau (TDFB).
JTID’s issuer credit rating is derived from a standalone credit profile (SACP) of ‘b-’ and our assessment that the Tianqiao District government has an extremely strong willingness to provide external support to the company in the event of financial distress.
KEY RATING RATIONALES
JTID is a state-owned enterprise (SOE) that serves as a crucial driver of core infrastructure construction and state-owned asset investment and operation within Tianqiao District. The company's primary activities encompass the construction of key infrastructure projects, land development and consolidation, the operation and development of industrial parks, building materials trading, property management, and the leasing and operation of state-owned assets. Its operations play a pivotal strategic role in facilitating regional economic development. JTID is currently entrusted with several significant government-led projects while also actively engaging in the development of industrial parks. Moreover, the company boasts a substantial portfolio of high-quality state-owned assets. In recent years, the Tianqiao District government has strategically injected or merged quality assets and state-owned enterprises into the company, thereby fortifying its asset base and enhancing the quality of its revenue streams. These initiatives underscore the company's paramount position within Tianqiao District. In our assessment, should JTID encounter financial challenges, the Tianqiao District government is expected to be committed to implementing necessary measures to support the company, safeguarding the uninterrupted progress of regional economic development.
Track record of support from the Tianqiao District government. JTID has received substantial external support from the Tianqiao District government, demonstrating its commitment to the company's business operations and growth. This support has been extended through various means, including financial subsidies, fund allocations, and asset injections. Notably, the company was granted government subsidies of RMB150 million, RMB300 million, and RMB350 million in 2020, 2021, and 2022, respectively. Moreover, the Tianqiao District government has consistently made capital injections and merged assets into the company. These actions have significantly bolstered the company's capital base and overall financial strength. Looking ahead, as the company progresses with its key project undertakings and expands its operations involving state-owned assets, we anticipate continued support from the Tianqiao District government.
Strong ties with the government. Ultimately and wholly owned by the TDFB, JTID is the largest local state-owned company in terms of total assets in Tianqiao District. The company’s board members and senior management team are endorsed by the Tianqiao District government, and the company's major business plans, investment decisions, corporate restructuring, and capital injection require approval from the Tianqiao District government, indicating the company’s operations are closely intertwined with the government.
Jinan City boasts robust economic strength, while the credit standing of Tianqiao District remains steadfast. The regional economy of Jinan City stands out with its considerable GDP size, which has been steadily ascending. In 2020, Jinan City's GDP surpassed the milestone of RMB1 trillion for the first time and further reached RMB1.2 trillion in 2022. This places the city's economic output as the second largest in Shandong Province, trailing only Qingdao City. Notably, our calculations indicate that in 2022, Jinan City's per capita GDP amounted to RMB128,286, nearly 50% higher than the average per capita GDP of Shandong Province. Tianqiao District, situated in the northern part of Jinan City, serves as the core urban area and recorded a registered population of 729,400 residents in 2022. Historically, the district held a prominent position as Jinan City's old industrial base, accommodating a host of chemical, paper, printing and dyeing, and automobile manufacturing enterprises. However, in recent years, Tianqiao District has placed strategic emphasis on industrial upgrading, spearheading the development of Jinan New Materials Industrial Park, Pharmasience Park, and other initiatives. As a result, the district has gradually established four key advantageous industries, namely new materials, intelligent manufacturing, high-end logistics, and modern commerce. Furthermore, despite the relatively limited scale of fiscal revenue in Tianqiao District, we note that the district maintains a favourable debt burden with well-managed debt growth within reasonable bounds. Overall, the credit status of the district remains stable.
The company carries a relatively high level of financial leverage. As of the end of 2022, the company's interest-bearing debt amounted to approximately RMB5.7 billion. Due to the company's involvement in significant projects such as land development, park development, and infrastructure construction in Tianqiao District, it is anticipated that the company will need to secure additional debt financing in the upcoming years to support its project undertakings, leading to a further increase in the debt scale. While the government's continuous asset injections have kept the company's gross debt-to-total capitalization ratio at a relatively moderate level of around 30% during 2021-2022, it is important to note that the company's EBITDA, in comparison to its debt balance and interest obligations, is relatively weak. This is evident from the debt-to-EBITDA ratio and EBITDA interest coverage ratio observed in 2022. The company's EBITDA scale appears relatively insufficient to adequately support its debt burden and provide comfortable interest coverage. Looking ahead, it is expected that the company's debt-to-EBITDA ratio will continue to remain at a relatively high level in the coming years, placing certain pressure on its cash flow and repayment capacity.
The company demonstrates lower operational efficiency and a relatively weak profitability profile. Influenced by its industry dynamics and operational model, the company faces challenges in optimizing its operational efficiency. In 2022, the company's accounts receivable turnover days and inventory turnover days stood at 252 days and 3,801 days, respectively, indicating a prolonged cash conversion cycle. Moreover, the extended collection period for accounts receivable adversely affects the company's operating cash flow, consequently weakening its ability to adequately cover its debt obligations. Additionally, our calculations reveal that JTID's average EBITDA profit margin for the period of 2021-2025 is estimated at 42%, indicating a reasonably healthy level. However, when excluding government subsidies, the company's profit margin appears relatively weak. This can be primarily attributed to the modest gross profit margins associated with the company's land development and infrastructure construction businesses. Furthermore, our calculations indicate an average return on invested capital of approximately 2.2% for the period of 2021-2025, suggesting a relatively subdued level of profitability in relation to the capital invested.
The rating outlook is stable, which reflects our expectation that the credit profile of the Tianqiao District government will remain stable and that JTID will be able to maintain its strategic role in the development of Tianqiao District going forward.
We would consider a rating downgrade if 1) JTID’s ties with the Tianqiao District government loosen from their current level; 2) the Tianqiao District government’s liquidity weakens substantially or its debt burden exacerbates tremendously; and/or 3) JTID’s market position in the infrastructure construction sector in Tianqiao District declines substantially.
We would consider a rating upgrade if 1) the Tianqiao District’s economic and fiscal revenue scale improves on a sustained basis; and/or 2) JTID’s importance to the Tianqiao District government increases significantly.
Jameson Zuo, FRM
+852 3615 8341
Vincent Ha, CFA
+852 3615 8307
+852 3615 8316
RATING SERVICE CONTACT
+852 3615 8324
Date of Relevant Rating Committee: 13 October 2023
Additional information is available on www.cspi-ratings.com
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