HONG KONG, 5 March 2021. Pengyuan International has assigned its global scale long-term issuer credit rating (LTICR) of ‘BBB-’ to Ji’an Chengtou Holding Group Company Limited (JACH). 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 assigned our issuance credit rating of ‘BBB-’ to JACH’s proposed issuance of USD300 million senior unsecured notes due 2024. 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
Track record of support from Ji’an government. Wholly-owned by the Ji’an SASAC, JACH is the largest local government financing vehicle (LGFV) in Ji’an city. The Company 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 RMB287 million, RMB351 million and RMB299 million for 2017, 2018 and 2019 respectively, accounting for about 70-100% of its net profit. In addition, the Ji’an government has made several capital injections to the Company, including a total of RMB5.5 billion capital injection through debt swap for the past 3 years and RMB15.6 billion asset transfer in first half of 2021. As members of the senior management are directly appointed by the Ji’an municipal government, we see a high degree of government control over the Company’s operations. A potential default of JACH would raise alarm over the Ji’an municipal government's own creditworthiness and reputation, in our view.
Strategically important to Ji’an municipal government. Focusing primarily on land development and infrastructure construction in Ji’an city, JACH is designated to carry out Ji’an government’s blueprint for municipal development within the city. In other words, the Company deeply engages in the city’s economic development by being a proxy of the municipal government in aspects of land development and public services investment. The failure of payment of JACH will trigger significant impact on the land assets and even put a halt to the city’s land sales and economic progress. We therefore believe that the government is willing to take necessary measures to ensure that the development of the region will not be affected in the event of financial distress.
Ji’an city’s creditworthiness is fairly strong. 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 the its burgeoning economy and modest debt leverage. Although the economy of Ji’an is not so strong with a low GDP per capita of RMB42,060 in 2019 or 21% below provincial average level, its economy has been improving vibrantly with an 8.1% GDP growth in 2019. In addition, the liquidity position of Ji’an is fairly strong, backed by the city’s solid fiscal deposit and room for debt raising.
Weak liquidity. We expect JACH’s liquidity to be insufficient with 24-month forward cash flow adequacy ratio of 0.7x, on a standalone basis. We believe the Company’s liquid assets on hand and expected funds from operations are not sufficient to fulfil all cash outflow requirement if all short-term debt payments have to be repaid without renewal. However, the potential government support could mitigate its liquidity stress, in our view. JACH’s external guarantees accounted for about 34% of its net assets in 1H2020, we believe this could dampen its financing capability during times of liquidity distress.
Low profitability. Despite of JACH’s relatively contained debt to capitalisation ratio of 50% in 2019, 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 from January 2019.
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.
+852 3615 8339
Jonathan Joseph Tai, CFA
+852 3615 8276
Ke Chen, PhD
+852 3615 8316
+852 3615 8296
RATING SERVICES ENQUIRIES
+852 3615 8324
Date of Relevant Rating Committee: 29 December 2020
Additional information is available on www.pyrating.com
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