HONG KONG, 10 March 2022. Pengyuan International has affirmed Ji’an Chengtou Holding Group Company Limited’s (JACH) global scale long-term issuer credit rating (LTICR) at ‘BBB-’. The outlook is 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 affirmed the issuance credit rating of JACH’s USD270 million 4.5% senior unsecured notes due 2024 at ‘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, and wholly owned by the Ji’an State-Owned Assets Supervision and Administration Commission (SASAC), JACH plays a key role in promoting the social, economic and urban development of the Ji’an city and is designated to carry out the government’s blueprint for urban infrastructure construction and municipal development in Ji’an. The Company primarily focuses on five business segments, namely (i) primary land development, (ii) urban infrastructure construction, (iii) property development, (iv) concrete business and (v) other businesses including leasing. Over the years, JACH has received strong financial and operational support from the Ji’an municipal government.
KEY RATING RATIONALES
Credit Strengths
Designated to carry out Ji’an government’s blueprint for municipal development. JACH engages in the city’s economic development by being a proxy of the municipal government in aspects of land development and public services investment, including infrastructure construction within the city. The failure of payment of JACH will trigger a significant impact on the land assets and even put a halt to the city’s land sales and economic progress. Therefore, we assess that in the event of financial distress, the Ji’an municipal government is willing to take necessary measures to ensure that the economic development of the region is not affected.
Continued operational subsidies and asset injection from Ji’an municipal government. JACH has in the past received significant support from the Ji’an government, including financial subsidies and capital contributions, to support the operation of its businesses. JACH received financial subsidies of RMB351 million, RMB299 million and RMB254 million for 2018, 2019 and 2020 respectively, accounting for about 70-100% of its net profit. In addition, the Ji’an government has made several asset injections including consolidation of an entity that mainly engages in affordable housing and land development in the region during the first half of 2021. Besides, the government also made RMB500 million capital injection in the second half of 2021 to the Company.
Close ties with Ji’an municipal government. Wholly-owned by the Ji’an SASAC, JACH is the largest local government financing vehicle (LGFV) in Ji’an city. As members of the senior management are directly appointed by the Ji’an municipal government, there is a high degree of government control over the Company’s operations. We believe the potential default of JACH would raise alarm over the Ji’an municipal government's own creditworthiness and reputation.
Fairly strong Ji’an city’s creditworthiness. As a prefecture-level city of Jiangxi province, Ji’an city has been benefitted from the province’s strong credit profile which is fuelled by its burgeoning economy and modest debt leverage. Despite that the economy of Ji’an is not so strong with a low GDP per capita, the liquidity position of Ji’an is fairly strong, backed by the city’s solid fiscal deposit and room for debt raising. The Ji’an municipal government’s creditworthiness is largely supported by its sufficient liquidity and moderate debt burden, but mostly dampened by lower level of economic development as well as widening budgetary deficit compared to other same-level municipal governments within the province.
Credit Weaknesses
Low profitability. We estimated that JACH debt to capitalisation ratio would increase sharply to 58% by the end of 2021, from 52% in 2020. Its gross margin excluding subsidies is thin as most of the Company’s projects are awarded by the Ji’an government on a not-for-profit basis. On completion of project construction, the Ji’an government will buy back infrastructure assets for a price that generally includes a mark-up of 5% on the total construction cost. Besides, development costs and land use rights that make up most of the inventory has relatively low liquidity, in our view.
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.
ANALYSTS CONTACT
Primary Analyst
Brian Lam
+852 3615 8339
brian.lam@pyrating.com
Secondary Analyst
Vincent Ha, CFA
+852 3615 8307
Committee Chair
Ke Chen, PhD
+852 3615 8316
MEDIA ENQUIRIES
media@pyrating.com
RATING SERVICES ENQUIRIES
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 28 February 2022
Additional information is available on www.pyrating.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)
General Principles of Credit Rating (21 November 2017)
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