HONG KONG, 31 October 2023. CSPI Ratings has assigned a global-scale long-term issuer credit rating (LTICR) of ‘BBB’ to Lanxi State-owned Capital Operation Company Limited (LXSCO). The outlook is stable. The company’s issuer credit rating is based on a standalone credit profile of ‘b-’ and our assessment of an extremely strong willingness to support from the Lanxi city government in the event of financial distress.
We have also assigned an issuance credit rating of 'BBB' to LXSCO’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.
LXSCO’s predecessor was established in 1997, with the Lanxi City People’s Government State-owned Assets Supervision and Administration Office (LXSASAO) being the company's 90% controlling shareholder currently. LXSCO is the most important infrastructure construction and state-owned asset management entity in Lanxi, mainly engaged in infrastructure construction, affordable housing development, and public services, such as public transport, water supply, and power generation in the city.
KEY RATING RATIONALES
More than the core executor of the Lanxi city government’s blueprint for infrastructure construction. LXSCO is the most important investment and financing entity, and a state-owned asset operation platform in Lanxi, primarily responsible for the infrastructure construction, affordable housing development, and public services, such as public transport, water supply, and power generation in the city. As such, a failure in LXSCO’s operation will have a material impact on Lanxi’s development progress and hurt its economic growth. We assess that in the event of financial distress, the Lanxi city government is willing to take necessary measures to support the company and ensure that the economic development of the city is not affected.
Long track record of government support. LXSCO received government subsidies of various types that amounted to RMB338 million, RMB453 million and RMB585 million, respectively, in 2020, 2021 and 2022 and were more than the company’s net profit in those three years. In addition, LXSCO also received capital injections, land and asset allocations, and other non-operational revenue, directly from the Lanxi city government to support the company’s operation and development. For instance, LXSCO's capital reserve increased from RMB13.75 billion at the end of 2020 to RMB24.03 billion at the end of 2022. We believe that the Lanxi city government will continue to support the company to facilitate the city’s infrastructure construction and economic development.
Strong ties with the government. 90% owned by LXSASAO, LXSCO is the core and largest local government enterprise in terms of total assets in Lanxi. The company’s board of directors and senior management team are endorsed by LXSASAO and LXSCO’s construction project counterparties are government-related entities (GREs) linked to the Lanxi city government. All of these strengthen the supervision and collaboration between the Lanxi city government and LXSCO.
Stable economic growth prospects in Lanxi with limited fiscal deficit pressure. Located in the mid-western region of Zhejiang Province, Lanxi is a county-level city affiliated to Jinhua. In recent years, Lanxi has been experiencing continuous economic growth and recorded a GDP of RMB46.5 billion in 2022, ranked fifth amongst the nine districts under Jinhua. Since Lanxi has a small population base, the city had a GDP per capita of RMB80,458, above the GDP per capita of Jinhua and ranked second in Jinhua. Lanxi is a typical industrial city, with textile, electricity, metallurgy, cement, medicine, chemical, and machinery being the seven core industries, while textile is the city’s traditionally advantageous and important pillar industry. In terms of fiscal budgetary strength, Lanxi’s fiscal deficit has been kept at a mild level, with relatively high budgetary income per capita and relatively low financial income. Besides, we estimate that the city’s budgetary income per capita is RMB22,555, materially above average local government level nationwide and demonstrating the financial strength of Lanxi.
High leverage. We consider the leverage of LXSCO to be high, with an average gross debt-to-total capitalization ratio of 70% during our estimation period of 2021-25. The company had a total debt of RMB44.27 billion by the end of 2022, which is expected to grow further due to business expansion and the continuation of ongoing projects. Moreover, LXSCO’s EBITDA scale is small relative to its debt level, and the company’s average debt-to-EBITDA ratio and EBITDA interest coverage ratio between 2021 and 2025 are estimated to be 46x and 0.4x, respectively.
Low profitability and weak cash flow. LXSCO’s gross profit margin is thin at less than 22% because most of its agent construction and engineering projects are awarded by the Lanxi city government on a not-for-profit basis, while some other businesses, such as printing and dyeing processing, transportation, and water supply also carry slim or even negative margins. Besides, the long period of receivables collection for construction projects also leads to weak cash flows from operations, with the funds from operations (FFO) to debt ratio expected to be about 1%.
The stable outlook for LXSCO reflects our expectation that the Lanxi city government’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of Lanxi going forward.
We would consider a rating downgrade if 1) LXSCO’s ties with the Lanxi city government loosen from the current level; 2) the fiscal strength of the Lanxi city government weakens substantially or its debt burden exacerbates tremendously; and/or 3) LXSCO’s business connection with the Lanxi city government weakens and its market position in the state-owned asset management and public service sectors in Lanxi declines significantly.
We would consider a rating upgrade if 1) Lanxi’s economic and fiscal revenue scale improves on a sustained basis; 2) LXSCO’s importance to the Lanxi city government increases significantly; and/or 3) there is substantial improvement in LXSCO’s leverage and financial profile.
Vincent Ha, CFA
+852 3615 8307
Leon Li, CFA
+86 755 2348 3867
Ke Chen, PhD
+852 3615 8316
Date of Relevant Rating Committee: 27 October 2023
Additional information is available on www.cspi-ratings.com
Government-Related Entities Rating Criteria (31August 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
Corporate Issuance Rating Criteria (11 March 2022)
Solicited ratings – disclosed and results not affected
CSPI Credit Ratings Company Limited (“CSPI Ratings”, “Pengyuan”, “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 © 2023 by CSPI Credit Ratings Company Ltd. All rights reserved.