CSPI Ratings Assigns BBB Rating to Lanxi State-owned Capital Operation Company Limited and the Company’s Proposed Senior Unsecured Offshore Notes; Outlook Stable


31 Oct 2023

    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

    Credit Strengths

    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.

    Credit Weaknesses

    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%.

    RATING OUTLOOK

    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.

    ANALYSTS CONTACT

    MEDIA CONTACT

    OTHER ENQUIRIES

    Primary Analyst

    Vincent Ha, CFA

    +852 3615 8307

    vincent.ha@cspi-ratings.com

    Secondary Analyst

    Leon Li, CFA

    +86 755 2348 3867

    leon.li@cspi-ratings.com

    Committee Chair

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@cspi-ratings.com

    media@cspi-ratings.com

    contact@cspi-ratings.com

    Date of Relevant Rating Committee: 27 October 2023

    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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