HONG KONG, 11 July 2023. CSPI ratings has assigned a global scale long-term issuer credit rating (LTICR) of ‘BBB’ to Ningbo Fenghua District Investment Group Co., Ltd. (NFDI). The outlook is stable. The company is an important development and construction entity in Fenghua District. Its main business includes project construction, primary land development, real estate sales, leasing, trading, security, and human resources services. NFDI’s issuer credit rating is made up of a standalone credit profile (SACP) of ‘b-’ and our assessment of the extremely strong willingness of extraordinary support from the Fenghua District government in the event of financial distress.
We have also assigned an issuance credit rating of 'BBB+' to NFDI’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
NFDI is the primary executor of construction and land development projects in Fenghua District. The company is a significant urban construction and state-owned asset management entity in the region, with businesses including local infrastructure construction, resettlement housing construction and operation, land consolidation and development, as well as trading, security and human resources services and leasing. Fenghua District is a prominent industrial zone in Ningbo City, with a strong industrial economic status. Following its transition from a county-level city to a district in 2016, there has been a significant demand for investment in project construction and urban renewal and transformation in the region. As a result, NFDI's construction business has experienced robust growth in Fenghua District, with an expanding business scale, good stability, and continuous development. The favorable development of NFDI has had a positive impact on the urban construction and economic development process of Fenghua District. We are of the view that in the event of any financial difficulties encountered by NFDI, the government of Fenghua District would be willing to take the necessary measures to support the company and ensure its operation, thereby guaranteeing the smooth implementation of the regional economic development plan.
The company has received persistent support from the Fenghua District government for an extended period of time. As the actual controller, the Fenghua District government has robustly bolstered the company. Between 2020 and 2022, NFDI received various government subsidies, tax refunds, exemptions, and other funds totaling RMB1.43 billion, RMB2.04 billion, and RMB1.62 billion, respectively. Additionally, the Fenghua District government has directly injected cash and assets into NFDI to support its operation and development. For instance, in 2022, the government transferred special fund subsidies of RMB350 million to the company, and used bond conversion to increase the company’s capital by RMB150 million. The government's continuous asset injection has enhanced the company's asset strength. We expect that the Fenghua District government will persist in supporting the company and boosting the development of its business sectors, thereby promoting project construction and urban upgrading in Fenghua District. In terms of total asset size, NFDI is a significant state-owned enterprise in Fenghua District. The company's board of directors and senior management are appointed by the Fenghua District government, and we believe that the Fenghua District government has a high degree of influence over the company's operation.
Ningbo City and Fenghua District have robust economic fundamentals and credit profiles. Ningbo City is one of the cities with an independent state plan in China, meaning it has provincial-level economic and financial management authority. In 2022, Ningbo's GDP reached RMB1.5 trillion, with a GDP per capita of over RMB 160,000, ranking among the top in the country and indicating a high level of economic development. Ningbo is a significant advanced manufacturing base and one of the first batch of demonstration cities for the "Made in China 2025" strategy, with a strong manufacturing foundation. Moreover, the Ningbo City government has maintained a moderate fiscal deficit in recent years. According to our calculations, the average budgetary balance to revenue ratio in Ningbo City from 2018 to 2022 was -5.5%, indicating the government's light fiscal deficit pressure.
As an important industrial base in Ningbo, Fenghua District has exhibited a strong economic performance, with a GDP per capita exceeding RMB150,000 in 2022, signifying a higher stage of economic development. In recent years, Fenghua District has accelerated the development of strategic industries such as new materials, high-end equipment, and new-generation information technology, focusing on the new industry system represented by new power, new fashion, new equipment, new information technology, new health, and new materials. Furthermore, our calculations reveal that the Fenghua district government has high financial liquidity, which enhances its ability to cope with financial pressure in the next few years.
Credit Weaknesses
The company has relatively high financial leverage. The gross debt-to-total capitalization ratio of the company was 69.7% and 70.3% in 2021 and 2022, respectively. As of the end of 2022, the company's interest-bearing debt amounted to approximately RMB 35.1 billion. Given the company's significant responsibilities in major construction projects, land development projects, and resettlement housing construction projects in Fenghua District, it will need to further increase its debt to invest in these projects in the coming years, leading to a steady increase in its debt scale. Consequently, we anticipate that the company's gross debt-to-total capitalization ratio will remain at a relatively high level of above 70%. Moreover, compared to its debt scale, the company's EBITDA is relatively weak, making it challenging for the company to repay the debt and interest solely relying on EBITDA. The high leverage ratio exerts pressure on the company's cash flow and solvency.
The company's operating efficiency is relatively low and its profitability is weak. Due to its industry and operating model, NFDI's operating efficiency is limited. A long cash conversion cycle has restricted the company's operating cash flow. We estimate the average EBITDA margin of NFDI for 2021-2025 to be 12.8%, which is at a moderate level, but the company's profitability weakens after deducting government subsidies. The company's construction business, with a longer construction period and government departments and other state-owned enterprises as clients, results in a generally low profit margin. We estimate the average return-on-invested capital of the company for 2021-2025 to be 0.7%, indicating that the overall profitability of the company is weak.
RATINGS OUTLOOK
The NFDI’s stable rating outlook is supported by its strong relationship with the Fenghua District government and the government’s stable credit profile over the next three years.
We would consider downgrading NFDI’s issuer credit rating if 1) NFDI’s ties with the Fenghua District government loosen from the current level; 2) the Fenghua District government’s fiscal strength weakens substantially or its liquidity deteriorates tremendously; 3) NFDI’s market position in the project construction and land development sectors in Fenghua declines significantly.
We would consider upgrading NFDI’s issuer credit rating if 1) the Fenghua government’s fiscal revenue expands materially and the debt burden is alleviated continuously; 2) the company’s importance to the Fenghua government increases significantly.
ANALYST CONTACTS
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Vincent Ha, CFA
+852 3615 8307
vincent.ha@cspi-ratings.com
Committee Chair
Ke Chen, PhD
+852 3615 8316
Media Contact
Rating Services Contact
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 8 June 2023
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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