HONG KONG, 9 January 2023. CSPI Ratings has assigned a global-scale long-term issuer credit rating (LTICR) of ‘BBB-’ to YanTai Muxin Development Group Co., Ltd. (YMDG) with a stable outlook. In recent years, following a period of consolidation, YMDG has emerged as a crucial state-owned enterprise responsible for the operation of state-owned assets and driving industrial development in Muping District, Yantai City. With a primary focus on the pharmaceutical, cultural tourism, talent, and finance sectors, the company plays a pivotal role in facilitating industrial growth and park construction in the region. Its robust regional market dominance and prominent position within the industry underscore its significance. Moreover, the company boasts an ample project pipeline, which serves as a solid foundation for its sustained business operations. In addition to its core activities, the company is also actively involved in land development and commodity sales within Muping District. Both the company's shareholder and the actual controlling entity is the Muping District State-owned Assets Supervision and Administration Bureau (MDSASAB).
YMDG’s issuer credit rating is derived from a standalone credit profile (SACP) of ‘b-’ and our assessment that the Muping District government has an extremely strong willingness to provide external support to the company in the event of financial distress.
KEY RATING RATIONALES
Credit Strengths
The company serves as a core state-owned enterprise in Muping District, primarily engaged in the investment and operation of state-owned assets, as well as industrial development. The company’s key activities encompass land development and consolidation, development and operation of industrial parks, and commodity sales, indicating its strategic role in driving regional economic growth. YMDG has successfully undertaken several significant projects aligned with the district's key development sectors, including pharmaceutical health, cultural tourism, talent education, and finance. Notably, the Muping District government has strategically integrated valuable assets and high-quality state-owned enterprises into the company over the past few years, resulting in an expanded asset portfolio and improved revenue quality. This underscores the company's vital position within Muping District. In our evaluation, should YMDG encounter financial challenges, we anticipate that the Muping District government would be inclined to implement necessary measures to support the company, ensuring uninterrupted economic development within the region.
The company has enjoyed longstanding support from the Muping District government. To facilitate the business operations and development of YMDG, the local government has demonstrated its commitment through various means, including financial subsidies, capital injections, and asset integrations. Notably, the company received government subsidies totalling RMB20 million in 2021 and RMB55.52 million in 2022. Moreover, the Muping District government has consistently bolstered the company's capital strength by injecting funds and merging assets. Looking ahead, as YMDG progresses with its key project undertakings and expands its operations involving state-owned assets, we anticipate that the Muping District government will continue to provide essential support to ensure the company's continued success.
The company holds strong ties with the government. Ultimately and wholly owned by the MDSASAB, YMDG is one of the largest local state-owned companies in terms of total assets in the Muping District. The company’s board members are endorsed by the Muping District government, and the company's major business plans, investment decisions, corporate restructuring, and capital injection require approval from the Muping District government, indicating the company’s operations are closely intertwined with the government.
Yantai City boasts a robust economic strength, and Muping District demonstrates a stable credit profile. Yantai City's industrial sector has a solid foundation, with a strong growth potential and a positive momentum for economic expansion. In 2022, the city's annual regional GDP reached RMB951.6 billion, reflecting a 5.1% year-on-year increase and securing the top position in terms of GDP growth in the province. The data for the first three quarters of 2023 indicates Yantai City's remarkable performance, with a 6.7% year-on-year growth in regional GDP, surpassing the national and provincial averages by 1.5 and 0.7 percentage points, respectively. The city's large-scale industries witnessed an 11.6% growth in value-added during the same period, showcasing a flourishing industrial landscape. Located in the eastern part of Yantai City, Muping District, though modest in economic size, demonstrates remarkable growth. In the first three quarters of 2023, the district achieved a regional GDP of RMB27.2 billion, indicating a 6.9% year-on-year growth, surpassing the national average by 2 percentage points. Muping District possesses a solid industrial foundation, encompassing traditional sectors such as machinery manufacturing, food processing, and electronic information, alongside emerging strategic industries like pharmaceuticals and healthcare, energy conservation and environmental protection, and high-end equipment. Furthermore, the district enjoys a relatively high per capita budgetary income level and maintains a moderate fiscal deficit, highlighting its strong fiscal capacity.
Credit Weaknesses
The company has experienced a notable increase in its financial leverage. As of the end of 2022, the company's interest-bearing debt stood at approximately RMB1.79 billion. Given the company's significant involvement in key projects such as land development and industrial park expansion in Muping District, it is expected that the company will rely on further borrowing to fund its ongoing project construction, leading to a projected growth in debt levels. It is important to note that the company's debt-to-total capitalization ratio remains relatively low at 25% in 2022, thanks to the continuous asset injections from the government. However, in comparison to its debt size, the company's EBITDA presents a relatively weaker performance. In 2022, the company's debt/EBITDA ratio and EBITDA interest coverage ratio were 13.5 times and 2.5 times, respectively, indicating a thin EBITDA scale concerning its debt balance and interest obligations. Looking ahead, we anticipate that the company's debt/EBITDA ratio will remain at a relatively high level in the coming years, exerting pressure on its cash flow and repayment capacity.
The company's operational efficiency is relatively low, and its profitability is somewhat weak. This can be attributed to factors such as the industry it operates in and its business model. In 2022, the company had an accounts receivable turnover period of 167 days and an inventory turnover period of 2,066 days, indicating a lengthy cash conversion cycle. Moreover, the extended period for accounts receivable collection has resulted in weaker operating cash flows and a limited ability to service its debt obligations. Furthermore, our calculations estimate that YMDG's average EBITDA profit margin for the period of 2021 to 2025 is 25%, which is considered favourable. However, when government subsidies are excluded, the company's profitability appears relatively weaker. This is primarily due to the company's land development and commodity sales activities, which are associated with lower overall gross profit margins. Additionally, our calculations indicate that the average return on invested capital for the company during the period of 2021 to 2025 is approximately 1.2%, indicating a relatively lower level of profitability compared to the capital invested.
RATING OUTLOOK
The rating outlook is stable, which reflects our expectation that the credit profile of the Muping District government will remain stable and that YMDG will be able to maintain its strategic role in the development of the Muping District going forward.
We would consider a rating downgrade if 1) YMDG’s ties with the Muping District government loosen from their current level; 2) The Muping District government’s fiscal deficit expands substantially or the district’s economic growth slows tremendously; and/or 3) YMDG’s market position in the land development and project construction sectors in Muping District declines substantially.
We would consider a rating upgrade if 1) the Muping District’s fiscal revenue scale and liquidity improve on a sustained basis; and/or 2) YMDG’s importance to the Muping District government increases significantly.
ANALYSTS CONTACT
Primary Analyst
Jameson Zuo, FRM
+852 3615 8341
Secondary Analyst
Vincent Ha, CFA
+852 3615 8307
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 5 January 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)
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