HONG KONG, 4 April 2023. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Suining Investment Group Co., Ltd (SIG). The outlook is stable. SIG’s issuer credit rating is made up of a standalone credit profile (SACP) of ‘b-’ and our assessment of the extremely strong willingness of extraordinary support from the Suining city government in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
Track record of financial support from the Suining city government. Wholly owned by Suining State-owned Assets Supervision and Administration Commission (SASAC), SIG is the primary local government financing vehicle (LGFV) in Suining city. The company has in the past received significant support from the Suining city government, including financial subsidies and asset injections, to support the operation of its businesses. SIG received financial subsidies of RMB1.2 billion, RMB1.4 billion, and RMB1.5 billion from 2019 to 2021, respectively, accounting for over 75% of its net profits. In addition, the Suining city government has made several asset injections to the company, including merging several major local SOEs in Suining into the company, boosting the company’s asset scale, and further entrenching the company’s importance in Suining city. Given that the senior management is directly appointed by the Suining city government, we see a high degree of government control over the company’s operations. We believe a default by SIG will cause market and social participants to question the credibility and reputation of the Suining city government.
Strategically important to the Suining city government. SIG is designated to carry out the major infrastructure construction projects in Suining city. In other words, the company acts on behalf of the municipal government in the construction and development of public utilities and deeply participates in urban economic development. Failure to pay SIG will have a major impact on urban infrastructure construction and even hinder the improvement of local public welfare and economic progress in urban area. Therefore, we believe that the Suining government is willing to take the necessary measures to ensure the sustainable development of SIG in order to get out of financial difficulties.
Sichuan Province's strong economic fundamentals and the stable credit profile of the Suining Municipal Government. Sichuan province registered a GDP of RMB5.7 trillion in 2022, ranking sixth among provincial administrative regions in China. The province's economy has maintained high growth rates over the past decade, with GDP growth at 2.9% in 2022 under the perennial epidemic impact. In recent years, Sichuan has focused on developing its five pillar industries: electronics and information, equipment manufacturing, food and beverage, advanced materials and energy, and chemicals. Coupled with Sichuan's strategic position in southwest China and various favourable policies in the Chengdu-Chongqing twin-city economic circle, we are optimistic about its long-term economic development prospects. Suining city is located in the middle of the Sichuan basin, forming an equidistant triangle with Chengdu and Chongqing, and is an important part of the Chengdu Plain Economic Zone. Suining's economic development and budget revenue growth rates have remained high. The city’s GDP growth rates registered 4.3%, 8.2%, and 4.2% between 2020 and 2022, respectively, remaining above the average for Sichuan Province, demonstrating the city's relatively strong economic development momentum. At the same time, considering that Suining is in the fast-growing stage of economic development, with the increase in investment and construction expenditure, the corresponding financing scale will continue to increase, and the overall debt burden is expected to remain at a relatively high level.
Credit Weaknesses
Relatively high financial leverage. We consider the leverage of SIG to be high, with a gross debt to total capitalization ratio of 49% during our estimation period of 2020-2024. The company had a total interest-bearing debt of RMB29.8 billion by the end of 2021, which is expected to continue to increase due to the company’s expansion plan for the infrastructure construction business and a large number of ongoing projects. However, compared with the scale of its debt, the company’s EBITDA has been rather thin. The calculated debt-to-EBITDA ratio between 2020 and 2024 is 17.5x, and an EBITDA interest coverage ratio of 0.9x. High leverage puts pressure on the company’s cash flow and solvency.
Low profitability and weak liquidity. Excluding government subsidies, the company's profit margins are slim. This is because most of the company's projects are awarded by the Suining government and are not for profit. Due to the inefficiency of business operations, the government only allows companies to earn marginal profits to support their operations, and the average return on invested capital is expected to be only 2.2% between 2020 and 2024. On the other hand, due to the company's slow operating turnover, limited operating cash flow, and large debt maturities in the next one or two years, the company relies more on refinancing to maintain its cash balance and relatively tight liquidity.
RATINGS OUTLOOK
The rating of SIG is supported by its very important strategic status in Suining, the strong support from the Suining city government, and the Suining city government’s stable credit profile. SIG’s rating is constrained by its high leverage, low profitability, and increasing borrowing.
We would consider downgrading SIG’s issuer credit rating should its credit profile deteriorate substantially, which could be caused by: 1) SIG’s ties with the Suining city government loosening from the current level; 2) Suining’s fiscal revenue declining considerably or fiscal deposit decreasing substantially; and/or 3) SIG’s business connection with the Suining city government weakening, and its market position in the infrastructure construction sector in Suining declining significantly.
We would consider upgrading SIG’s issuer credit rating should its credit profile improve substantially, which could be caused by: 1) the Suining government’s economic and fiscal revenue scale improving on a sustained basis or its leverage dropping considerably; 2) a substantial improvement in SIG’s leverage and financial profile; and/or 3) SIG’s importance to the Suining government increasing significantly.
ANALYST CONTACTS
Primary Analyst
Brian Lam
+852 3615 8339
brian.lam@cspi-ratings.com
Secondary Analyst
Jameson Zuo, FRM
+852 3615 8341
Committee Chair
Ke Chen, PhD
+852 3615 8316
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 31 March 2023
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)
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