HONG KONG, 13 June 2023. CSPI Ratings has upgraded Mudanjiang City Investment Group Company Limited’s (MDJCIG) global scale long-term issuer credit rating (LTICR) to ‘BB+’ from ‘BB’. The outlook is stable.

MDJCIG’s issuer credit rating is based on a standalone credit profile of ‘b-’ and our assessment that its parent, Mudanjiang State-owned Assets Investment Holdings Company Limited (MDJSAI), has an almost certain willingness to provide extraordinary support in the event of financial distress. MDJSAI is wholly-owned by the Mudanjiang State-owned Assets Supervision and Administration Office (MDJSASAO), making it a government-related entity (GRE) and its credit profile is linked to that of the Mudanjiang city government. MDJCIG’s rating is based on the perspective of parent support, and is underpinned by its parent MDJSAI’s almost certain willingness to support it and its leading position in Mudanjiang’s urban construction.

With its predecessor established in 2000, MDJCIG is an important investment and financing entity and a large state-owned operation platform in the Mudanjiang city of Heilongjiang province. The Company is the main entity authorised by the Mudanjiang government and is primarily responsible for the construction and development of the majority of urban construction projects in the city. MDJCIG has over 80% market share of Mudanjiang’s affordable housing development projects, covering all projects except for Jiangnan New Town. The Company primarily operates in three business segments, namely urban construction, other construction and other businesses.

KEY RATING RATIONALES

Credit Strengths

Executor of Mudanjiang’s blueprint for municipal construction and development. MDJCIG engages in Mudanjiang’s economic development by being the city’s most important platform for urban construction, including affordable housing and infrastructure, land development and municipal asset operations. The Company has over 80% market share in Mudanjiang’s affordable housing development projects. As such, a failure in MDJCIG’s operation will have a significant impact on the city’s urban development progress and hurt its economic growth. We assess that in the event of financial distress, the Mudanjiang government, through MDJSAI, is willing to take the necessary measures to support MDJCIG and ensure that the economic development of the city is not affected.

Long-standing track record of government support. MDJCIG received government subsidies of various types, amounted to RMB538 million, RMB964 million and RMB0.17 million, respectively, in 2020, 2021 and 2022, and accounted for up to 93% of the Company’s net profit. In addition, MDJCIG also received capital injections, land and asset allocations, and other non-operational revenue from the Mudanjiang government to support the Company’s operation and development. We believe that the Mudanjiang government will continue to support MDJCIG, through MDJSAI, to facilitate the city’s land development.

Strong ties with the government via the parent. MDJCIG is Mudanjiang’s second largest local government financing vehicle (LGFV) in terms of revenue and total assets. It is 83.6% owned by its parent MDJSAI, which is wholly-owned by MDJSASAO. Both MDJSAI and MDJCIG’s boards of directors and senior management team are appointed by the Mudanjiang Party Committee and their scope of business is approved by MDJSASAO. All of these strengthen the supervision and collaboration among the Mudanjiang city government, MDJSAI and MDJCIG.

Modest Mudanjiang’s creditworthiness with higher-level government support. As a prefecture-level city located in the southeast part of Heilongjiang province, Mudanjiang is within the ‘golden triangle’ of the Chinese, Russian and Korean peninsula and an important city in northeastern China. While the city’s self-sufficiency in its budgetary revenue has been relatively low, higher-level governments have been giving consistent and strong fiscal support to Mudanjiang and this significantly augments the city’s revenue scope. To elaborate, support from higher-level governments has accounted for over 70% in Mudanjiang’s budgetary revenue for the past few years. As a consequence, the city had a resilient 14.6% revenue growth in 2022 despite contracted land sales, while its fiscal deficit remained modest at 10.9%.

Credit Weaknesses

High leverage, low profitability and weak cash flow. We estimate that MDJCIG’s net debt to adjusted EBITDA ratio will stay above 25x in the next few years. The Company’s gross profit margin is thin as most of its projects are awarded by the Mudanjiang government on a not-for-profit basis. On completion of project construction, the city government will buy back the assets for a price that generally includes a 15% mark-up over the total development cost. Besides, the long period of receivables collection also leads to weak cash flows from operations.

Tight liquidity. We expect MDJCIG’s liquidity to be tight with its 12-month forward cash flow liquidity ratio of 0.9x. We believe the Company’s liquid assets on hand and expected funds from operations are insufficient to fulfil all cash outflow requirements if all short-term debt payments have to be repaid without renewal. MDJCIG’s current assets are mostly land that is classified as inventories, and receivables to government-related entities, both of which are not very liquid. The Company will require significant financing to cover its debt payments and maintain its business operations. However, we expect financial pressure on its interest payments to be low when the government and parent support is sufficient.

RATING OUTLOOK

The stable outlook for MDJCIG reflects our expectation that the credit profile of the Mudanjiang city government and MDJSAI will remain stable, and that MDJCIG is able to maintain its strategic role in the development of Mudanjiang going forward.

We would consider a rating downgrade if 1) MDJCIG’s ties with its parent MDJSAI loosen from the current level; 2) the fiscal strengths of the Mudanjiang city government weaken substantially or its debt burden exacerbates tremendously; and/or 3) MDJCIG’s business scopes develop into more commercial and market-driven sectors, such as commercial property development, as opposed to social welfare-oriented businesses.

We would consider a rating upgrade if 1) the Mudanjiang city government’s economic and fiscal revenue scale improves on a sustained basis; 2) MDJSAI’s importance to the Mudanjiang city government increases significantly; and/or 3) there is a substantial improvement in MDJCIG’s leverage and financial profile.

Date of Relevant Rating Committee: 31 May 2023

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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