HONG KONG, 14 July 2022. Pengyuan International has affirmed the global scale long-term issuer credit rating (LTICR) of ‘A-’ for Capital Airports Holdings Limited (CAH), with a stable outlook.
CAH’s issuer credit rating is based on its standalone credit profile (SACP) of “bb-“ and our assessment that the Chinese central government has a very strong willingness to provide support to the Company in the event of a financial crisis. Therefore, CAH’s credit profit is closely linked to the creditworthiness of the Chinese central government (AA/stable).
The rating reflects CAH’s position as China’s leading airport group and its strategic importance to the Chinese central government, as the Company operates most of the major airports in northern China, including Beijing Capital International Airport (BCIA), one of the most important airport hubs in China. Besides, the ramp-up of Daxing International Airport should open up new business opportunities and drive growth.
Founded in 2002 and headquartered in Beijing, CAH is a government-related entity (GRE) under the Civil Aviation Administration of China (CAAC). Through its subsidiaries, the Company mainly engages in airport management, airport construction, logistics, real estate, hotel management and financial investment. In 2021, CAH’s air passenger throughput, cargo throughput and takeoffs/landings were 140 million persons, 2.3 million tonnes and 1.4 million flights, respectively, with year-on-year growth of 9.7%, 12.7% and 8.7%, respectively. The Company manages 53 airports in 7 provinces and autonomous regions, including Beijing, Tianjin, Hebei, Jiangxi, Jilin, Inner Mongolia and Heilongjiang. In terms of air passenger throughput, CAH is also one of the largest airport management groups in the world.
KEY RATING RATIONALES
Important industry position and leading scale advantage. CAH reported 74% more revenue and 115% more air passenger throughput than China’s second-largest airport group in 2021. The Company has an airport portfolio focusing on the northern region of China, with 53 airports under management. Notably. BCIA is one of the most important aviation hubs in China. It ranked sixth first in terms of air passenger throughput and fourth in terms of air cargo throughput in 2021. After the opening of Daxing International Airport in 2019, CAH’s capacity bottleneck in Beijing is now relaxed, paving room for core and peripheral business growth in the region. Despite the Chinese government’s plan to build more airports and increase air passenger throughput, we think that the Company’s leading position should remain in the foreseeable future.
Strong governmental connections with high strategic importance. Fully owned by CAAC, CAH has been receiving various forms of government support such as subsidies, tax cuts and capital injections, especially amid the coronavirus pandemic. We see the government’s strong influence over CAH’s long-term strategies by appointing board members and senior management to the Company. Moreover, CAH’s ownership and management of the airports in China’s capital also signifies its importance to the government. Apart from that, the Company’s products and services represent the public image of China, and are strategically important to northern China’s economic development, besides being involved in the nation’s civil airspace security. Considering the importance, we think that the Chinese central government would not hesitate to support CAH in distressed situations.
Leverage and liquidity profile staying resilient amid the epidemic. Despite the impact of the epidemic, CAH managed to maintain decent liquidity without excessive borrowing or equity financing. The Company’s current ratio was 1.0x as of December 2021, similar to the level as of December 2019. Meanwhile, the quick ratio just slightly deteriorated to 0.7x as of December 2021 from 0.6x as of December 2019. In our view, CAH achieved stable liquidity by effectively controlling its cash expense and operating cash outflow, as well as rebalancing its debt structure with a significant reduction of short-term debt in 2021.
Near-term profitability under pressure. The coronavirus pandemic and the consequent travel restrictions have been posing unprecedented challenges to CAH’s operation and income level. The Company also confronts additional margin pressure due to the addition of Daxing International Airport which led to a jump in capacity and hence higher operating expenses. Even though we expect CAH’s income scale to further recover to the pre-pandemic level in 2023-24, we estimate that the Company’s EBITDA margin level in the foreseeable future is unlikely to return to the above-40% level before 2020, given expectations of lower airport capacity utilization.
Significant government interference in operation. When compared with airport groups overseas, CAH and other Chinese airport groups are subject to more operational interference from the government. One observation is the generally less efficient asset turnovers and operating expense control for Chinese airport groups vs. global peers. This could be caused by the government’s tight control of China’s airspace which affects the takeoff and landing efficiencies. In addition, the central government’s leading role in national airport infrastructure planning leaves less flexibility for the Company to fully optimise its operation. Last but not least, any big changes in China’s aviation policies could also affect CAH’s revenue structure. For instance, the removal of the refund of airport construction funds to BCIA in 2019 has impacted the Company’s revenue. All in all, government interference inevitably diminishes the transparency and predictability of CAH’s financials.
The stable outlook for CAH reflects Pengyuan International’s expectation that the Company will be able to maintain its market position as one of the leading airport groups in the world, with a strong regional advantage and efficient cash flow management. Pengyuan International also expects CAH to remain as a wholly-owned entity under CAAC.
We would consider downgrading CAH’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) a significant and sustained decrease in air passenger and cargo throughput; 2) a weakening in the central government’s willingness to support the Company with strong evidence; and/or 3) a substantial deterioration of CAH’s financial profile.
We would consider upgrading CAH’s issuer credit rating if its credit profile improves substantially, which could be caused by a strengthening of the central government’s willingness to support the Company due to an increase in its importance to the government.
Note: ratings mentioned above are unsolicited.
Vincent Ha, CFA
+852 3615 8307
+852 3615 8339
Ke Chen, PhD
+852 3615 8316
Date of Relevant Rating Committee: 29 June 2022
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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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