HONG KONG, December 13, 2024. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Zhangzhou Jingyuan Development Co., Ltd. (ZJDC), with a stable outlook. The company is an important urban construction and state-owned assets operating entity in Zhangzhou High-tech Industrial Development Zone (ZHIDZ), the company is primarily responsible for the construction of transportation infrastructure and resettlement housing projects in the Jingyuan area, while also engaging in leasing, road maintenance, and property management services. ZJDC’s sole shareholder and ultimate controller is the Finance Bureau of ZHIDZ. ZJDC’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b-’ and our assessment that ZHIDZ government has extremely strong willingness to provide external support to the company in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
Important urban construction and state-owned assets operating entity in ZHIDZ. The company is a key entity in urban construction and state-owned asset management in ZHIDZ. In recent years, to fully leverage the abundant land resources of ZHIDZ and its proximity to the main urban area of Zhangzhou, the zone has focused on promoting the backbone infrastructure of network, as well as carrying out shantytown renovation projects to improve land use efficiency. As an important infrastructure construction entity responsible for the development of the Jingyuan area in ZHIDZ, the company has undertaken a number of projects, including traffic infrastructure and resettlement housing, which have contributed to the development of the industrial economy in ZHIDZ. We assess that the company's business continuity is decent in view of the strong operating exclusivity of the company's main operating business in the region. We assess that in the event of financial distress, the ZHIDZ government is willing to take necessary measures to support the company and ensure that economic development and public utilities operation in the region will not be affected.
Strong government support. The Finance Bureau of ZHIDZ holds 100% of the company's shares, making it the sole shareholder and actual controller. The company has long received strong support from the ZHIDZ government in areas such as asset transfers and capital injections. In 2022, the company received funding of RMB162.6 million from the ZHIDZ government. From January to August 2024, the company received an additional RMB57.4 million in government funding, along with the injection of pipeline assets worth RMB869.5 million, a franchise right valued at RMB624.6 million, and properties worth RMB477.5 million. This resulted in a total increase in the company's capital reserve of RMB2.0 billion, significantly enhancing its capital strength. As of the end of August 2024, the company's total capital reserve reached RMB3.7 billion, primarily consisting of assets allocated by the government. Considering that the company's directors, supervisors, and senior management team are all appointed with the approval of the ZHIDZ government, we believe that as the company progresses with key project construction, the ZHIDZ government will continue to provide necessary support to promote urban development and economic growth in the region.
ZHIDZ government maintains a stable credit profile. ZHIDZ is one of the four key economic growth poles being developed in Zhangzhou City. Leveraging its abundant land resources and proximity to the main urban area, the zone has promoted the construction of the "Three Major Areas" in recent years, resulting in strong industrial development momentum and good economic growth prospects. Although the budget revenue scale of ZHIDZ is relatively small, the local government has effectively managed its fiscal balance in recent years, and future budget surpluses are expected to remain positive. The debt burden of the ZHIDZ poses significant pressure on its fiscal revenue. We estimate that the zone's fiscal deposits are relatively thin, but based on its strong budget surplus performance, it appears to have a robust liquidity coverage ratio, indicating an overall acceptable liquidity situation.
Credit Weaknesses
Relatively high financial leverage and low available liquidity. Benefiting from the large-scale asset transfers from the government between January and August 2024, the company's leverage level has significantly decreased. However, considering that the company still requires substantial investment for ongoing infrastructure projects and that its operating cash flow continues to be in a net outflow state, the company will need to rely on external financing to meet its funding needs in the future. The debt scale is expected to continue growing, keeping the leverage ratio at a high level. As of the end of November 2024, the company has an unused credit limit of RMB0.2 billion from banks and other financial institutions, which is insufficient to cover the capital needs arising from debt repayments, interest payments, and project expenditures. Therefore, the company will need to continue broadening its financing channels in the future.
Low operating efficiency and weak profitability. Influenced by the industry it operates in and its business model, the company's operational efficiency is relatively low. In 2023, the accounts receivable turnover days and inventory turnover days were relatively high, resulting in a long cash turnover cycle and weak operating cash flow performance. Additionally, we estimate the company's weighted average EBITDA margin from 2022 to 2026 to be 10.0%, but after excluding government subsidies, the company's profit margin appears relatively weak. We project the weighted average return on invested capital for the company during the 2022-2026 period to be 1.0%, indicating that the profit level is low relative to capital investment.
RATING OUTLOOK
The stable outlook for ZJDC reflects our expectation that the ZHIDZ government’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of ZHIDZ going forward.
We would consider a rating downgrade if 1) ZJDC’s ties with ZHIDZ government loosen from current level; 2) The economic strength and fiscal capacity of ZHIDZ declines significantly; and/or 3) ZJDC’s market position in ZHIDZ declines significantly.
We would consider a rating upgrade if 1) ZJDC’s importance to the ZHIDZ government increases significantly; 2) The liquidity situation of ZHIDZ improves significantly; and/or 3) There is substantial improvement in ZJDC’s leverage and financial profile.
ANALYST CONTACTS
Primary Analyst
Tingting Qiao
+852 3615 8339
tingting.qiao@cspi-ratings.com
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Larissa Wu
+852 3615 8317
larissa.wu@cspi-ratings.com
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 9 December 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)
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