HONG KONG, 21 April 2023. CSPI Ratings has upgraded Ji’an Chengtou Holding Group Company Limited’s (JACH) global scale long-term issuer credit rating (LTICR) to ‘BBB’ from ‘BBB-’. The outlook remains stable. JACH’s issuer credit rating is based on a standalone credit profile of ‘b’ and our assessment of an extremely strong willingness to support from the Ji’an municipal government in the event of financial distress.

We have also upgraded the issuance credit rating of JACH’s USD270 million 4.5% senior unsecured notes due 2024 to ‘BBB’ from ‘BBB-‘. The notes constitute direct, general, unsubordinated, unconditional and unsecured obligations of the issuer, and shall at all times rank pari passu among themselves and with any other present and future unsubordinated and unsecured obligations of the issuer.

Established in May 2016, JACH is is mainly owned by Ji'an State-Owned Assets Supervision and Administration Commission (Ji’an SASAC), accounting for 90% of the ownership, while the remaining 10% is owned by Jiangxi Administrative Institution Assets Group Company Ltd (JAIAG).  Its primary objective is to contribute significantly to the social, economic, and urban development of Ji'an City, and has been entrusted with executing the Ji'an SASAC's plans for municipal development and urban infrastructure construction.  The company primarily focus on five business segments, namely (i) primary land development, (ii) urban infrastructure construction, (iii) property development, (iv) concrete business and (v) other business including leasing etc. The Ji'an Municipal Government has provided substantial financial and operational support to JACH since its inception.

KEY RATING RATIONALES

Credit Strengths

Implementing Ji’an government’s plan for municipal development. The rating upgrade of JACH is based on our assessment that the consolidation of smaller platforms in the region into the group in recent years has increased the company's brand recognition and perceived value among the general public. JACH serves as a proxy for the Ji’an municipal government in matters related to land development and public services investment, such as infrastructure construction, which are crucial for the economic growth of the city. The failure of payment of JACH could have severe consequences, including a negative impact on land assets and even a slowdown in the city's economic progress by halting land sales. Therefore, we believe that if financial difficulties arise at the company, the Ji'an municipal government will take the necessary measures to safeguard the economic development of the region.

Ji'an municipal government maintains strong connections and provides continuous financial assistance. Ji’an Chengtou Holding Group Co., Ltd. (JACH), the largest local government financing vehicle (LGFV) in Ji'an city, is currently 90% owned by Ji'an SASAC and 10% owned by Jiangxi Administrative Institution Assets Group Company Ltd. (JAIAG). The Ji'an municipal government appoints senior management members, indicating a high level of government influence over the company's activities. The potential default of JACH could raise concerns about the Ji'an government's creditworthiness and reputation. JACH has received substantial support from the Ji'an government in the form of financial subsidies and capital contributions to facilitate its operations. These subsidies amounted to RMB299 million, RMB254 million, and RMB455 million in 2019, 2020, and 2021, respectively, which represents approximately 69-125% of its net profit.

Government oversight on business operations. Due to JACH's senior management being appointed directly by the Ji'an municipal government, we observe substantial governmental control over the Company's operations. If the Company were to hypothetically default, we anticipate that the market and social participants would begin to question the creditworthiness and reputation of the Ji'an municipal government itself. Additionally, all of the Company's major clients are all within or affiliated with the Ji’an municipal government.

Fairly strong Ji’an City’s creditworthiness. Ji'an City, a prefecture-level city in Jiangxi province, benefits from the province's strong credit profile, fueled by a growing economy and modest debt leverage. While Ji'an's economy may not be very strong, with a low GDP per capita, the city still maintains a fairly strong liquidity position thanks to its solid fiscal deposits and room for debt raising. The municipal government's creditworthiness is mainly supported by its adequate liquidity and moderate debt burden, but is somewhat dampened by a lower level of economic development and widening budget deficit compared to other municipal governments at the same level within the province.

Credit Weaknesses
Low profitability. Despite having a relatively contained debt to capitalization ratio of 53% in 2021, we anticipate that JACH's ratio will rise to 60% by the end of 2024. The Company's gross margin, excluding subsidies, is narrow as most of its projects are awarded by the Ji'an government on a not-for-profit basis. Once the projects are completed, the Ji'an government repurchases the infrastructure assets at a price that generally includes a 5% markup on the total construction cost. Moreover, we believe that the development costs and land use rights, which constitute the majority of the Company's inventory, have relatively low liquidity. On the other hand, JACH's low turnover in the land development business resulted in a low return on invested capital (ROIC) of 1.4% in 2021.

RATING OUTLOOK

The stable outlook for JACH reflects our expectation that the Ji’an municipal government’s credit profile will remain stable and the Company will be able to maintain its operations on the back of extremely strong support from the Ji’an government.

We would consider downgrading JACH’s issuer credit rating if its credit profile worsens substantially, which could be caused by 1) significant deterioration of the credit profile of the Ji’an municipal government on a prolonged basis; 2) weakened willingness to provide extraordinary support by the Ji’an government in the event of financial distress.

We would consider upgrading the Company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) substantial improvements in the credit profile of the Ji’an government on a sustained basis; 2) increased willingness to provide extraordinary support by the Ji’an government in the event of financial distress.

Date of Relevant Rating Committee: 21 March 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)

Corporate Issuance Rating Criteria (17 March 2023)

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