HONG KONG, April 15, 2024. CSPI Ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB’ to Zhangzhou Taiwanese Investment Zone Asset Operation Group Co., Ltd. (ZTIZAO), with a stable outlook. The company is a major infrastructure construction and state-owned asset management entity in Zhangzhou Taiwanese Investment Zone (ZTIZ), mainly engaged in infrastructure construction, affordable housing development, merchandise sales and other services. The company is ultimately owned and controlled by the Financial Bureau of ZTIZ Management Committee. ZTIZAO’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b-’ and our assessment that ZTIZ government has extremely strong willingness to provide external support to the company in the event of financial distress.

We have also assigned an issuance credit rating of 'BBB' to ZTIZAO’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.

KEY RATING RATIONALES
Credit Strengths

Prominent business position in ZTIZ. As the most important infrastructure construction and state-owned assets operation entity in ZTIZ, ZTIZAO mainly engages in infrastructure construction, affordable housing development, merchandise sales and other services. Given that the company will continue to play a key role in the economic development of ZTIZ in the future, we believe that the business stability and sustainability of the company are robust, and the future vision of the company’s development is promising. We also assess that in the event of financial distress, the ZTIZ government is willing to take necessary measures to support the company and ensure that the economic development and public utilities operation in the region is not affected.

Track record of supports from the ZTIZ government. Zhangzhou Taiwanese Investment Zone Management Committee Finance Bureau is the actual controller and sole shareholder of ZTIZAO. As the most important LGFV in ZTIZ, ZTIZAO continuously received capital injections, assets allocations and financial subsidies from the ZTIZ government over the past few years. In September 2023, the Financial Bureau of the Zhangzhou Taiwanese Investment Zone Management Committee transferred its 60% equity in the Zhangzhou Economic Development Group Co., Ltd., 100% equity in the Zhangzhou Jiaomei Rail Transit Development Co., Ltd., and 100% equity in the Zhangzhou Jiaomei Agricultural Development Co., Ltd. to the company without compensation. As of the end of September 2023, the company’s consolidated capital reserve was RMB7.039 billion, mainly for special funds allocated by the local government and assets transferred. In 2021, 2022 and first three quarter of 2023, the company received government subsidies of RMB20.03 million, RMB20.13 million and RMB13.75 million respectively. We believe that with the advancement of key projects undertaken by the company in the future, the ZTIZ government will continue to provide necessary support to the company.

Strong economic fundamentals of ZTIZ, and stable credit profile of the ZTIZ government. Zhangzhou has established a solid foundation for industrial development, and experienced robust economic development in recent years, with focus on developing green economy. In 2023, Zhangzhou's gross domestic product (GDP) reached RMB572.84 billion, growing by 5.9% compared to the previous year at constant prices, outpacing the national and provincial averages by 0.7% and 1.4%, respectively. We estimate that Zhangzhou City can maintain a growth rate of over 6% in the next two years.

ZTIZ is a nationally designated Taiwanese investment zone. With geographical advantages, it has developed five dominant industries: specialty steel, automotive parts, electronic appliances, food industry, and paper products. In 2023, the industrial added value in the entire ZTIZ increased by 10.1%, fixed asset investment grew by 3.0%, and the total retail sales of consumer goods increased by 8.8%. The per capita GDP in the zone for 2023 was RMB 151,528 in our calculation, approximately 34% higher than the average level in Zhangzhou City. Additionally, despite the relatively small scale of budgetary revenue in the ZTIT, the local government has managed its income and expenditure balance effectively in recent years, maintaining a low level of deficit.

Credit Weaknesses

High financial leverage. We expect the company’s debt scale to steadily increase over the next few years due to continuation of ongoing construction projects, and business expansion for self-operated projects such as industrial parks and rail transit. As of the end of September 2023, the company's total interest-bearing debt amounted to RMB9.53 billion, increasing 29.5% from RMB7.36 billion at the end of 2022. We anticipate that the company's debt-to-capital ratio rises from 42.9% in 2022 to 47.9% in 2023, and will remain above 50% in the coming years. Moreover, ZTIZAO’s EBITDA scale is small relatively to its debt level, with estimated weighted average debt-to-EBITDA ratio of 8.5x and EBITDA interest coverage ratio of 2.7x respectively.

Tight Liquidity. The company's operating efficiency is relatively low due to its industry and business model. In 2022, the receivable days and inventory days were 69 and 509, respectively. The company's inventory mainly consists of development costs incurred from affordable housing construction and infrastructure construction, which have longer construction and recognition cycles, resulting in weaker liquidity. We calculate the company's cash flow liquidity ratio to be 0.06x and quick ratio to be 0.57x in the next 12 months (2024), implying the company's short-term liquidity is insufficient. The company's cash outflows in 2024 are expected to be nearly RMB5.115 billion, primarily for the repayment of short-term debt. Overall, considering the company's undrawn bank facilities and future cash inflows, we believe that the company's liquidity is under pressure.

Relatively Weaker Control Over Newly-merged Subsidiaries. The company's main businesses are primarily operated by its significant subsidiaries such as Zhangzhou Economic Development Group Co., Ltd. and Zhangzhou Jiaomei Rail Transit  Development Co., Ltd. Given the recent merger of these subsidiaries and the ongoing optimization of business segments, we should pay attention to the company's actual control over its subsidiaries and the subsequent integration of business segments in the future.

RATING OUTLOOK

The stable outlook for ZTIZAO reflects our expectation that the ZTIZ government’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of ZTIZ going forward.

We would consider a rating downgrade if 1) ZTIZAO’s ties with the ZTIZ government loosen from current level; 2) The liquidity of the ZTIZ government weakens substantially or its fiscal balance worsens tremendously; and/or 3) ZTIZAO’s business connection with the ZTIZ government weakens, and its market position in the construction sector in the ZTIZ declines significantly.

We would consider a rating upgrade if 1) The ZTIZ government’s economy and fiscal revenue scale expands on a sustained basis; 2) The ZTIZ government’s economy and fiscal revenue scale expands on a sustained basis; and/or 3) ZTIZAO’s importance to the ZTIZ government increases significantly.

Date of Relevant Rating Committee: 12 April 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)

Corporate Issuance Rating Criteria (11 March 2022)

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