Pengyuan International Affirms State Grid Corporation of China at ‘AA-’ Rating; Outlook Stable


15 Jul 2022

    HONG KONG, 15 July 2022. Pengyuan International has affirmed the global scale long-term issuer credit rating (LTICR) of ‘AA-’ for State Grid Corporation of China (SGCC), with a stable outlook.

    SGCC’s issuer credit rating is based on its standalone credit profile (SACP) of “a”, and our assessment that the Chinese central government has an extremely strong willingness to provide support to the Company in the event of a financial crisis. Therefore, SGCC’s credit profit is closely linked to the creditworthiness of the Chinese central government (AA/stable).

    The rating reflects SGCC’s dominant position in China’s electricity supply, its strong ties with the government, and its overall strong operating and financial profile. The rating is constrained by the Company’s lack of business diversity, which makes it vulnerable to economic and business cycles.

    Founded in 2002 and wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council (the central SASAC), SGCC primary engages in the construction, operation and maintenance of the electric grid that covers 26 provinces and regions in China, or more than 88% of China’s land size.

    KEY RATING RATIONALES

    Credit Strengths

    Extreme importance to the Chinese central government. Wholly owned by the central SASAC, SGCC has close ties with the central government of China. The top management members of the Company, such as the Chairman of the board, generally have very high political status and their appointments are subject to the approval of the central government. Based on our assessment, SGCC is economically and socially vital to the central government as many economic and social activities cannot be carried out smoothly and stably without the Company’s high-quality operation of the power grid. SGCC provides basic and indispensable infrastructure for many industries in China and we believe the services that the Company provides will give China a solid foundation to achieve its ambition in an industrial upgrade. In our opinion, the central government is highly likely to support SGCC in the event of financial distress given the Company’s irreplaceable dominant position in China’s electricity supply.

    Near-monopoly position in China’s electricity distribution sector. SGCC is the world’s largest utility company with a revenue size of RMB3 trillion in 2021, ranking second on Fortune Global 500 list in 2021. The Company has a near-monopoly position in China’s electricity distribution sector. By our estimates, in 2021, over 70% of nationwide electricity generation volume was connected to the power grid run by SGCC and more than 60% of the entire electricity consumption in China was transmitted and distributed via the Company’s network. SGCC also launched the world’s longest Ultra-High Voltage (UHV) line, the Zhundong-Wannan line with a voltage of 1,100kV, from China’s north-western region to the heavily populated eastern region in 2019.

    Robust financial profile. SGCC’s gross debt to capitalisation ratio of 35% in 2021 is relatively low when compared to the 50% ratio of China Southern Power Grid. Given the current debt assumption and an unshakeable dominance in electricity distribution, we believe that the Company retains the significant capacity to increase its debt, and a strong capability to serve its debt and interest payments in the foreseeable future. Although SGCC’s financials have taken some hit due to the outbreak of the coronavirus pandemic in 2020-21, we believe that the Company’s healthy leverage and profitability will remain intact.

    Credit Weaknesses

    Lack of diversity. Although SGCC involves in a wide range of business, the Company’s operating results are still highly dependent on one single segment: power supply, in which demand is highly driven by economic activities, especially from the industrials sector. As a result, SGCC’s revenue is exposed to and fluctuates with China’s economic cycles.

    High capital requirements. Due to the construction of power grids, SGCC had high capital expenditure in recent years, with an average annual expenditure of more than RMB430 billion over the last five years. The Company announced that it has planned more than RMB500 billion on grid investment in 2022, a historically high level. To support the energy reform of adopting renewable energy sources and expanding demand for electric vehicle (EV) charging networks, we believe that SGCC will continue to have high capital expenditure in the near future.

    RATINGS OUTLOOK

    The stable outlook for SGCC reflects Pengyuan International’s expectation that the Company will be able to maintain its market position as the largest grid company in China and our assessment of the extremely strong central government’s willingness to support the Company in the event of financial distress.

    We would consider downgrading SGCC’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) substantial evidence of weakening central government’s willingness to support the Company in the event of financial distress; 2) Pengyuan’s downgrade in China’s foreign-currency sovereign credit rating; and/or 3) a significant decline in the Company’s SACP as some company-specific or industry-specific conditions, including China’s electricity demand growth, political intervention on retail tariffs and SGCC’s debt level, are substantially below expectations.

    We would consider upgrading SGCC’s issuer credit rating if China’s foreign-currency sovereign credit rating is upgraded, although this is a remote possibility in the near term.

    Note: ratings mentioned above are unsolicited.

    ANALYSTS CONTACT

    MEDIA CONTACT

    OTHER ENQUIRIES

    Primary Analyst

    Vincent Ha, CFA

    +852 3615 8307

    vincent.ha@pyrating.com

    Secondary Analyst

    Winnie Guo

    +852 3615 8344

    winnie.guo@pyrating.com

    Committee Chair

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@pyrating.com

    media@pyrating.com

     

    contact@pyrating.com

     

     Date of Relevant Rating Committee: 30 June 2022

    Additional information is available on www.pyrating.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 Aug 2018)


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