HONG KONG, 26 April 2024. CSPI ratings has assigned the global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Zhengzhou Zhengshangxincheng Construction and Development Group Co., Ltd. (ZZCD). The outlook is stable. ZZCD’s issuer credit rating comprises a standalone credit profile (SACP) of ‘b-’ and our assessment of the extremely strong willingness of extraordinary support from the Shangjie District government in the event of financial distress.
ZZCD plays a pivotal role as the primary local state-owned investment and financing entity under the jurisdiction of the Shangjie District government. It carries out essential responsibilities such as land consolidation and development, infrastructure construction, municipal facility maintenance, the establishment of specialized industrial parks, and driving regional industrial development in Shangjie District. The Zhengzhou Shangjie District State-owned Assets Administration Center (SDSAAC) holds a 100% stake in ZZCD and assumes the role of the company's controlling shareholder and actual controller.
We have also assigned the issuance credit rating of 'BBB-' to ZZCD’s proposed senior unsecured offshore bonds, not exceeding RMB1.5 billion. The bonds, 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. It is important to note that this rating is preliminary and is subject to our thorough review of the final issuance documentation.
KEY RATING RATIONALES
Credit Strengths
A leading investment, construction, and operational entity in Shangjie District's infrastructure and public service sectors. The company holds a prominent market position and regional significance as the primary player in investment, construction, and operations within Shangjie District's infrastructure and public utility sectors. As a wholly state-owned enterprise under the jurisdiction of the Shangjie District government, ZZCD assumes vital responsibilities, including land consolidation and development, infrastructure construction, municipal facility maintenance, the establishment of specialized industrial parks, and the facilitation of regional industrial development. Its notable competitiveness in managing state-owned assets and contributing to urban development and construction within the region is well-recognized. The company's main business exhibits a commendable level of stability and sustainability. As a key participant in Shangjie District's urban development, as well as a major operator of state-owned assets, the company actively engages in the region's economic growth and urbanization endeavors, showcasing promising prospects for future expansion. Recognizing the integral role the company plays in Shangjie District's economic development, the local government stands committed to taking necessary measures to ensure the company's enduring success. In the event of operational challenges or financial difficulties, the government will provide essential support to ensure uninterrupted economic progress within the district.
Shangjie District government extends continued and robust support to the company. The company benefits from unwavering support provided by the Shangjie District government. SDSAAC holds 100% equity in ZZCD, acting as the company's controlling shareholder and ultimate controller. The appointment of the company's key senior management positions is entrusted to the Shangjie District government, and their performance undergoes rigorous evaluation, affording the government significant control and influence over the company's operations. The company has fostered a close and mutually beneficial relationship with the Shangjie District government, characterized by cohesive collaboration. The government has consistently demonstrated strong support through various means, including asset transfers, capital injections, and fiscal subsidies. Notably, the company has received government subsidies amounting to RMB46.5 million, RMB14.5 million, and RMB4 million for the years 2020, 2021, and 2022, respectively. Furthermore, the SDSAAC has made substantial asset injections into the company, encompassing monetary funds, subsidiary equity, land use rights, and infrastructure projects. These initiatives have bolstered the company's asset base and fortified its financial standing. Recognizing the company's indispensable role in driving Shangjie District's infrastructure development, we believe that the Shangjie District government will continue to extend necessary support as the company undertakes pivotal projects in the field.
Zhengzhou City's robust economic development and Shangjie District government's stable credit standing. Zhengzhou, the capital city of Henan Province, stands as a powerhouse of economic growth in central China. Designated as a national center city and a core growth pole for high-quality development in the region, Zhengzhou has cultivated a comprehensive industrial foundation. Its six key industries, including electronic information, automobile and equipment manufacturing, have flourished, demonstrating a convergence with the modern service sector. Benefiting from its strong local economic competitiveness, Zhengzhou enjoys a favorable level of budgetary revenue and maintains a modest fiscal deficit. Shangjie District, one of the six administrative districts within Zhengzhou, serves as a suburban industrial district. In 2023, the district achieved a regional GDP of RMB17.4 billion, reflecting a growth rate of 6.1% compared to the previous year. The industrial value-added also experienced a 4.8% increase during the same period. Through strategic development initiatives in high-end equipment manufacturing, new materials, general aviation, and modern logistics, Shangjie District has laid the groundwork for a modern industrial ecosystem, with general aviation leading the way and advanced manufacturing and modern services providing a solid foundation. Presently, the district boasts a remarkable 106 industrial enterprises operating at or above a significant scale. Given the district's favorable industrial structure and the promising prospects for future economic growth, we maintain an optimistic stance towards Shangjie District's continued development.
Credit Weaknesses
Sustained Increase in Financial Leverage. The company has experienced a continuous rise in its financial leverage. As of the end of 2022, the company's total interest-bearing debt stood at approximately RMB3.5 billion. Considering the company's prominent role in undertaking essential infrastructure construction and operational projects in the Shangjie District, it will need to rely on further debt financing in the upcoming years to meet its capital requirements. Consequently, the company's debt scale is expected to steadily grow. When assessing the company's financial position, it is worth noting that its EBITDA relative to its debt is relatively thin. Based on our calculations, the estimated debt-to-EBITDA ratio for the company in 2022 is 39.1x, with an EBITDA interest coverage ratio of 0.4x. These figures indicate a potential strain on the company's cash flow and its ability to service its debt. Looking ahead, we anticipate that the company's leverage ratio will remain at a comparatively high level in the coming years, posing certain challenges to its cash flow management and debt repayment capacity.
Low efficiency and tight Liquidity. ZZCD 's operating efficiency is relatively low due to its industry and business model. In 2022, the receivable days and inventory days were 206 and 6,661, respectively. The company's inventory mainly consists of development costs and products incurred from infrastructure construction projects, which have longer construction and recognition cycles, resulting in weaker liquidity. Moreover, we calculate the company's cash flow liquidity ratio to be 0.02x and quick ratio to be 0.24x in the next 12 months (2024), implying the company's short-term liquidity is insufficient. Overall, considering the company's undrawn bank facilities and future cash inflows, we believe that the company's liquidity is under pressure.
RATINGS OUTLOOK
The stable outlook for ZZCD reflects our expectation that the Shangjie District’s credit profile will remain stable and the company will be able to maintain its strategic role in the development of the Shangjie District going forward.
We would consider a rating downgrade if 1) ZZCD’s ties with the Shangjie District government loosen from the current level; 2) The liquidity of the Shangjie District government weakens substantially or its fiscal balance worsens tremendously; and/or 3) ZZCD’s business connection with Shangjie District government weakens, and its market position in the construction sector in the Shangjie District declines significantly.
We would consider a rating upgrade if 1) The Shangjie District government’s economy and fiscal revenue scale expands on a sustained basis; and/or 2) ZZCD’s importance to the Shangjie District government increases significantly.
Note: The above content is the English translation of the Chinese press release. In case of any discrepancies, the Chinese version shall prevail.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Siqi Lin
+86 755 8321 0225
Committee Chair
Larissa Wu，Ph.D. FRM
+852 3615 8317
larissa.wu@cspi-ratings.com
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 24 April 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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