HONG KONG, 8 Aug 2024. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of BBB’ to Jiyuan Capital Operation Group Co., Ltd. (JCOG), with a stable outlook. JCOG is positioned as the most important capital operation and industrial investment entity in Jiyuan (Jiyuan Demonstration Area, JDA), and its main business contents include capital operation and industrial investment, supply of water, heat and gas, grain and oil purchase and sale, engineering construction, comprehensive services, etc. The only shareholder and actual controller of JCOG is the JDA State-owned Assets Supervision and Administration (JDASASA). JCOG’s issuer credit rating is based on a stand-alone credit profile (SACP) of ‘b-’ and our assessment that the JDA government has extremely strong willingness to provide external support to the company when needed.
We have also assigned an issuance credit rating of 'BBB' to JCOG’s proposed senior unsecured offshore notes. 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. The proposed issuance rating is provisional and subject to our review of the final offering documents.
KEY RATING RATIONALES
Credit Strengths
JCOG is positioned as the most important capital operation and industrial investment body in Jiyuan. JCOG is continuing to promote the integration of industry and finance plans, through capital operation and industrial investment to participate in and support the development of local advantageous industries, including non-ferrous metals, steel, chemicals, green buildings, etc. In addition, JCOG plays an important role in the supply of water, heat and gas, the purchase and sale of grain and oil, engineering construction, comprehensive services and other fields in Jiyuan. JCOG’s advantages in capital operation and public services will continue to play an important role in local economic development. We hold a positive outlook on JCOG's business prospects. We believe that if JCOG has financial difficulties, the JDA government will have a strong willingness to take necessary measures to support the company and ensure that the economic development of Jiyuan will not be affected and the smooth implementation of the regional economic development plan.
Long-standing track record of government support. The continuous transfer of assets enriches the company's revenue sources. With the acquisition of high-quality equity rights such as Henan Yuguang Gold and Lead Group Co., LTD. and operational assets such as parking lot fee rights and clean energy project development rights, JCOG’s profitability and marketization operation ability have been further enhanced. Moreover, between 2021 and 2023, the company received government subsidies totalling RMB13.88 million, RMB12.12 million, and RMB31.78 million, respectively. We believe that the JDA government will continue to support the company and promote the development of local advantageous industries. JCOG is wholly owned by JDASASA, and the board of directors and senior management are appointed by the JDA government, which we believe has a great influence on the company's operations.
Sound economic fundamentals and credit status of Jiyuan. Jiyuan is directly administered by Henan Province, and it is also the first Comprehensive Production City Integration Demonstration Area endorsed by China's National Development and Reform Commission. By 2023, Jiyuan's GDP had reached RMB78.86 billion, with a per capita GDP of RMB107,955, which was 1.8 times higher than Henan Province's average, signifying a commendable level of economic development. Jiyuan has a good industrial foundation. Jiyuan is the largest green lead and zinc smelting base in Asia and the largest silver production base in China, as well as an important steel, energy, chemical and equipment manufacturing base in Henan Province. At the same time, the JDA government has maintained a more moderate fiscal deficit in recent years, with an average budgetary balance to revenue rate of -6.0% from 2019 to 2021, -20.6% and -12.7% in 2022 and 2023, respectively. In 2023, the budgetary revenue of Jiyuan is RMB10.47 billion, and the proportion of tax revenue in the general public budgetary revenue is 78.3%, ranking first in Henan Province, indicating its high-quality financial revenue.
Credit Weaknesses
Leverage levels are rising. From 2021 to 2023, the company's total debt stood at RMB1.42 billion, RMB2.23 billion, and RMB2.74 billion, respectively, showing a continuous upward trend. Over the same period, JCOG's debt-to-EBITDA ratio escalated to 9.2x, 10.0x, and 29.1x, respectively, indicating a persistent increase in leverage. As JCOG expands its business in the future, the debt scale is anticipated to grow further. In recent years, JCOG’s EBITDA interest coverage ratio has declined. In 2023, the company's debt-to-total capitalization ratio is about 20%, which is expected to rise in the future, but the overall performance remains within normal parameters. Given the ongoing capital expenditure on existing projects and the relatively flat growth in business income (excluding investment income), we expect its leverage indicators will continue to face pressure in the coming years.
Earnings stability is of concern, and liquidity is mediocre. Apart from revenue from public utilities, engineering construction, comprehensive trade, and other business operations, JCOG derives profit contributions from capital operations and industrial investments. From 2021 to 2023, the company's investment income was RMB158 million, RMB111 million and RMB371 million, respectively. Over the same period, corporate return on capital (ROIC) was at a low level of 3.0%, 1.3% and 2.5%, respectively. The correlation between profit performance and investment return is high, warranting further scrutiny of stability. We estimate that the cash flow ratio and quick ratio of the company in the next 12 months are 0.86x and 0.34x respectively, and the short-term liquidity needs to be satisfied by debt continuation and refinancing. Taking into account the company's current bank line of credit and future cash inflows and outflows, we believe that the company's liquidity is mediocre.
RATING OUTLOOK
The stable outlook for JCOG reflects our expectation that the JDA government will maintain a stable credit profile and that JCOG will continue to play an important strategic role in participating in Jiyuan's economic development.
We would consider a rating downgrade if 1) JCOG’s ties with the JDA government loosen from the current level; 2) the economic strength of Jiyuan is weakened, and the budget deficit level is greatly increased; and/or 3) JCOG’s business connection with the JDA government weakens, and its market position in Jiyuan declines significantly.
We would consider a rating upgrade if 1) the budget revenue scale of Jiyuan is significantly increased, the debt level is significantly reduced, and the liquidity situation is significantly improved; 2) the importance of JCOG to Jiyuan has significantly increased.
ANALYSTS CONTACT
Primary Analyst
Jameson Zuo
+852 3615 8341
Secondary Analyst
Sherlock Liang
+86 755 2348 3690
sherlock.liang@cspi-ratings.com
Committee Chair
Larissa Wu
+852 3615 8317
larissa.wu@cspi-ratings.com
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 23 July 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)
Corporate Issuance Rating Criteria (11 March 2022)
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