BEIJING，September 27,2021 -- S&P Global (China) Ratings has affirmed its “Aspc+” issuer credit rating on China Construction Civil Infrastructure Corp. Ltd (“CSCEC Civil Infrastructure” or “Company”), the outlook is stable.
CSCEC Civil Infrastructure is a wholly owned subsidiary of China State Construction Engineering Corporation Ltd (“CSCEC”). The company facilitates the development of CSCEC’s infrastructure construction business through investing in various infrastructure projects.
In our view, the issuer credit rating of “Aspc+” reflects CSCEC Civil Infrastructure’s strict project investment policy and approval process, and the relatively high quality of its projects. The company, as a wholly owned subsidiary, plays an important role in carrying out and developing CSCEC's infrastructure business strategy. We expect it to continue in these roles in the future and as such we view that this company is of high importance to CSCEC. Tempering these strengths are the company’s ongoing capital investment into its many projects under construction, leading to its financial leverage maintaining a relatively high level. In our view, there is some uncertainty over the operations of the company’s assets, and some of the company's projects are located in areas with average economic and financial fiscal positions.
In our view, the company has developed a sound investment approval policy and process and has maintained good discipline over its investments. All investment projects need to be submitted to CSCEC for approval, and CSCEC has the final say on investment decisions. This investment discipline ensures the project’s quality. All the company’s PPP projects are included in the Ministry of Finance’s PPP Management Database and China Public Private Partnerships Center (CPPPC), and government-pay and viability gap funding (VGF) are included in the local government's fiscal budget. By the end of June 2021, the company had 21 PPP projects with total investment of around RMB 75 billion, and 23 non-PPP projects with total planned investment (calculated in proportion to equity) of RMB 23.5 billion.
For the projects in which the company has invested, we view their return mechanisms as good, with low market risk exposure. Among the company’s 21 PPP projects, ten have government-pay mechanisms, and the remaining eleven projects operate through VGF mechanisms. In our view, the regional exposure for the company’s projects is overall slightly higher than the national average level. However, certain regions where projects are located have fair economic and fiscal positions.
In line with the industry, half of the company’s 21 PPP projects are still in the construction phase, and projects that have got underway are mostly in the initial stage of operations. There remains some uncertainty over how future operations will affect the business, as well as receipt of corresponding repayments. For 2020 and the first half of 2021, the company’s PPP projects received payments of around RMB 900 million and RMB 200 million respectively.
We view the company’s financial risk profile as significant. With half of its projects under construction, we expect the company's leverage ratio to remain at a high level as construction progresses, and its total debt to EBITDA and expected project payment is expected to reach 7-9 times. However, its EBITDA and total project repayment could provide good interest coverage. Thanks to its relatively good financing structure, we expect project repayment to cover both interest and principal payment when major projects enter stable operation. PPP project financing offers some flexibility, which may mitigate some pressure from the risk of untimely collection of project repayment.
We view that CSCEC Civil Infrastructure is of high importance to CSCEC. The company plays an important role in carrying out and developing CSCEC's infrastructure business strategy. We expect the company to continue in these roles in the future. In our view, CSCEC’s strict management of the company's investment operations and finances will continue for the foreseeable future, strengthening their linkage and allowing CSCEC to be in a position where it can provide timely extraordinary support when needed.
The stable outlook on CSCEC Civil Infrastructure reflects our view that the company would gradually complete its current PPP projects and enter operation over the next 24 months. We also expect the company to continue to hold its strict investment approval process and investment standards for new investment projects. The company’s debt level is expected to grow as its ongoing investment projects progress. However, as the projects gradually enter operation and gradually deliver returns, the leverage ratio and interest coverage ratio would remain relatively stable. As a wholly owned subsidiary of CSCEC, CSCEC Civil Infrastructure’s strategic role of developing infrastructure investment business is not expected to change, and it can continue to receive support from its parent CSCEC.
We might consider upgrading the rating of CSCEC Civil Infrastructure if:
1) The company's business risk profile improves while maintaining its current financial risk profile. Improvements to its business risk profile may include: i) the company developing a track record in project repayments after they enter operation, reducing the uncertainty in project repayments; or ii) the company’s future projects are increasingly located in areas with stronger economic performance. Or
2) As the projects continues to collect repayments, the company gradually uses these proceeds to pay back its PPP project loans, reducing the company's financial risk on a sustainable basis. Or
3) The importance of the company within the CSCEC group increases.
We might consider lowering the rating of the company if:
1) The company's business risk profile deteriorates. This scenario could occur if i) there is a significant relaxation of the company’s and CSCEC’s requirements for management and investment of projects; or ii) the company’s future projects have weaker regional exposure, or iii) poor operation of completed projects, seriously affecting project payback. Or
2) Group support is weakened. This scenario could occur if the company's importance to CSCEC is lowered, or CSCEC’s indicative credit quality deteriorates significantly on a prolonged period, resulting in declining indicative support ability. Or
3) The company’s authority over the financial management of its projects changes significantly.
In our view, the last two scenarios are unlikely to occur in the foreseeable future.
Related Methodologies:
― S&P Global (China) Ratings-Corporate Methodology, 28 July 2020
― S&P Global (China) Ratings Supplemental Methodology—Transportation infrastructure Industry, 21 May 2019
― S&P Global (China) Ratings General Considerations on Rating Modifiers and Relative Ranking, 21 May 2019
Related Research:
― Commentary: Understanding S&P Global (China) Rating Corporate Methodology,28 July 2020
― Commentary: Understanding S&P Global (China) Ratings General Considerations On Rating Modifiers and Relative Ranking Methodology,29 June 2020
― Commentary: Understanding S&P Global (China) Ratings Approach To Support,8 May 2019
Media Contacts:
Sharon.Tang，Beijing；(86)10-6569-2988；sharon.tang@spgchinaratings.cn
Analyst Contacts:
Renyuan.Zhang，Beijing；renyuan.zhang@spgchinaratings.cn