HONG KONG, 6 August 2023. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Weifang Ocean Development Group Co., Ltd. (WFHF). We have also assigned an issuance credit rating of 'BBB-' to WFHF’s proposed senior unsecured offshore note. 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 proposed issuance rating is provisional and subject to our review of the final offering documents. The outlook is stable.
WFHF is an important public utility and state-owned asset management entity in the Weifang Binhai Economic and Technological Development Zone (BHETDZ). It primarily engages in energy and water supply, talent services, financial services, and merchandise sales business within the region. The Weifang Binhai Economic and Technological Development Zone State-owned Assets Management Office (BHETDZSAO) holds 100% of the equity in the company and is the controlling shareholder and actual controller. The issuer credit rating of WFHF is based on the ‘b-’ Standalone Credit Profile (SACP) and our view that the BHETDZ Government has extremely strong willingness to provide additional support to WFHF in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
Important public utility and state-owned asset management entity in the BHETDZ. WFHF is primarily responsible for energy and water supply, human resource services, financial services, property management, landscaping and sanitation businesses within the BHETDZ. The company also operates in the commodity sales segment, showcasing a high level of business diversification. The company has strong regional franchise advantages in the public utility and state-owned asset management sectors within the region, ensuring the stability and sustainability of its operations. The BHETDZ is a national economic and technological development zone, holding a prominent position in the development strategy of Weifang City. Given WFHF's continued importance in the BHETDZ’s economic development and urban construction, we believe that the BHETDZ Government is willing to take necessary measures to ensure the company’s sustainable development and provide necessary support in the event of financial distress.
Long track record of support from the BHETDZ Government. As an important local state-owned enterprise in the BHETDZ, WFHF maintains close ties with the BHETDZ Government. Since its establishment, the company has received substantial support from the BHETDZ Government in forms of capital injections, asset allocations, and fiscal subsidies. In 2023, the BHETDZSAO injected RMB930 million in capital into WFHF, along with assets like the Future Building and state-owned enterprise equity, enhancing the company’s capital position. Additionally, WFHF has received stable government subsidies over the past few years. We believe that as long as the company continues to play an important role in the development of the BHETDZ, the BHETDZ Government will continue to provide necessary support to the company. On the other hand, the company's board of directors and senior management are all endorsed and appointed by the BHETDZ Government. Moreover, the BHETDZ Government is closely involved in the company's investment and operational strategies, exerting a high level of influence over the company's operations.
Strong economic foundation in Weifang City and promising development prospects of BHETDZ. Weifang City is the central city in the Shandong Peninsula. Benefiting from its solid industrial foundation, Weifang City has experienced rapid economic growth in recent years. The city's economic scale has consistently ranked fourth in Shandong Province and within the top 40 among prefecture-level cities nationwide in recent years. The BHETDZ is a national economic and technological development zone and has successively been awarded the titles of National Ecological Industrial Demonstration Zone, High-end Equipment Manufacturing Industry Base in the Bohai Rim, and National Integration of Industry and City Demonstration Zone. In the first half of 2024, the BHETDZ has been actively developing its industrial economy centred on the "No. 1 Project", with a focus on high-end, intelligent, green, and clustered development. The economic growth momentum has been strong, with the added value of large-scale industries growing by 12.3% year-on-year, securing the top position within the city. Overall, the economic development prospects of the BHETDZ are promising, and we are optimistic about its future economic growth. Weifang City and the BHETDZ's solid industrial foundation and rapid industrial growth provide a stable external environment for the company's development.
Credit Weaknesses
Continuous growth in debt and unfavourable external environment. As of the end of 2023, the company's interest-bearing liabilities amounted to approximately RMB2.1 billion. Our calculations show that the company's gross debt-to-total capitalisation ratio has decreased from 35.8% in 2022 to a relatively low level of 11.9% in 2023, a significant decline primarily attributed to substantial asset injections during the year. However, it is expected that the company's interest-bearing debt will continue to grow in the coming years as the energy and water supply business expands and ongoing construction projects progress. Furthermore, the company's EBITDA scale is relatively small compared to its debt level. Based on our estimates, the company's average debt/EBITDA ratio and EBITDA interest coverage ratio for the 2022-2026 period are 17.1x and 1.3x respectively, reflecting its relatively weak debt servicing capability. Additionally, the overall debt pressure in the BHETDZ is relatively high. The company has provided guarantees and engaged in fund transfers with other state-owned enterprises within the BHETDZ. This raises the risk of financial distress from some of these state-owned enterprises passing to the company, due to the interconnected nature of their operations and finances.
Tight liquidity. According to our calculations, the company's future cash flow liquidity ratio and quick ratio are projected to be 0.04x and 0.08x respectively in 2025, indicating its relatively weak short-term debt servicing ability. We estimate that the company's cash outflows in 2025 will be around RMB2.3 billion, primarily consisting of short-term debt repayments and interest-related expenses. However, the company's operating cash flow is relatively weak, with insufficient capacity to service its debt obligations. We expect the company's cash inflows to be quite thin in the near term, amounting to only RMB90 million in 2025. Furthermore, the company has limited unused bank facilities, resulting in insufficient liquidity. Given the company's present bank credit situation and anticipated future cash flows, we foresee a significantly constrained cash flow position for the company
RATING OUTLOOK
The stable outlook for WFHF reflects our expectation that the credit profile of the BHETDZ Government will remain stable and that WFHF can retain its strategic role in the development of the BHETDZ going forward.
We would consider a rating downgrade if 1) WFHF’s ties with the BHETDZ Government loosen from the current level; 2) The economic growth rate of the BHETDZ decreases significantly or the fiscal strength of the BHETDZ Government deteriorates tremendously; and/or 3) WFHF’s business connection with the BHETDZ Government weakens, and its market position in the state-owned asset operation sector in the BHETDZ declines significantly.
We would consider a rating upgrade if 1) BHETDZ Government’s liquidity increases materially and its debt level declines substantially; and/or 2) WFHF’s importance to the BHETDZ Government increases significantly.
ANALYSTS CONTACT
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 6 August 2024
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)
Corporate Issuance Rating Criteria (11 March 2022)
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