Fitch Ratings has assigned a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘BBB-‘ to Zhuhai Port Holdings Group Co., Ltd. (ZHPG). The Outlook is Stable.
ZHPG is a state-owned enterprise (SOE) fully owned by the Zhuhai Municipal Government. ZHPG’s ratings are derived from Fitch’s internal assessment of the creditworthiness of Zhuhai municipality, based on a top-down approach in line with our Government-Related Entities Rating Criteria. This reflects our assessment of the local government’s strong control and support record, and its strong incentive to support ZHPG.
ZHPG develops and operates Zhuhai port, the sole deep-water seaport in Zhuhai in southern China. It is also the exclusive licensed gas provider in Zhuhai. The Stable Outlook reflects our expectation that ZHPG’s operations will remain stable and government support will stay strong.
KEY RATING DRIVERS
Strong Control, Support Record: We assess ZHPG’s Status, Ownership and Control as ‘Strong’ as the Zhuhai government maintains full ownership and exerts strong control over ZHPG through Zhuhai State-owned Assets Supervision and Administration Commission (SASAC), which appoints the company’s board members and senior management, approves major investment and financing plans, and monitors operating and financial performance.
We also assess the Support Record as ‘Strong’ to reflect the consistent support received by ZHPG from the municipal government, including capital and zero-cost asset injections, subsidies, and policy backing.
Strong Incentive to Support: Fitch assesses the socio-political implications of a ZHPG default at ‘Strong’, because ZHPG is the sole developer and operator of Zhuhai port, the sole deep-water port in the city and the west bank of the Pearl River Delta. ZHPG is also the exclusive city gas provider and the company is appointed by the government to complete Zhuhai’s natural gas network.
Fitch assesses the financial implications of a default by ZHPG for the Zhuhai government as ‘Strong’. ZHPG is the third-largest local government-related entity (GRE) by asset size and by outstanding bond amount in Zhuhai at end-3Q21. A default will have negative impact on the creditability of Zhuhai city and impair access to funding by the city’s other GREs.
Diversified Business; High Leverage: Fitch assesses ZHPG’s Standalone Credit Profile (SCP) at ‘b’, supported by a diversified business but constrained by high leverage. ZHPG has good-quality port assets and a stable gas business that form its core operation, and entered other areas, such as new-energy manufacturing. Leverage, measured by net debt/EBITDA, rose to 16.5x by end-2020 from 13.9x at end-2019. Fitch estimates leverage to have peaked at 17.9x at end-2021 after debt-funded acquisitions in 2020-2021, before falling to 15x in 2023-2024 as ZHPG has completed its major investments.
Sufficient Financial Flexibility: ZHPG’s credit profile also supported by the group’s smooth and diversified funding access, and well-spread debt maturity profile. ZHPG enjoys ample unused bank facilities leveraging on its SOE background. ZHPG and its major listed subsidiaries are active bond issuers in onshore markets and bond issuances have proceeded smoothly. There is no concentration of ZHPG’s debt maturities in single year.
DERIVATION SUMMARY
ZHPG’s IDR of ‘BBB-‘ is notched from Fitch’s internal assessment of the credit profile of Zhuhai municipality under our Government-Related Entities Rating Criteria, due to the high likelihood of support from the local government. The rating gap is comparable with that of other municipal SOEs that perform certain public service roles, such as Shougang Group Co., Ltd (A-/Stable), which is owned by Beijing SASAC.
ZHPG’s linkages to the municipality are weaker than that for Zhuhai Huafa Group Co., Ltd. (BBB/Stable), the largest SOE under Zhuhai SASAC, reflecting ZHPG’s smaller scale and lower level of control by government, and weaker financial implication should it default. Huafa accounts for more than half of the total assets held by municipality-owned enterprises and is the largest onshore bond issuer among all local SOEs.
However, Fitch assesses ZHPG to have ‘Strong’ socio-political implication of default due to its critical role in providing public services related to the port and city gas. In comparison, the socio-political implications of a default by Huafa are ‘Moderate’ due to its involvement in urban development and commercial property, which face competition from the private sector.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
– Fitch assesses ZHPG’s SCP on a deconsolidated basis by excluding three newly acquired manufacturing companies;
– Deconsolidated revenue at CNY20 billion in 2021, and at CNY22 billion-24 billion during 2022-2024;
– EBITDA margin at 6.5% in 2021, and stay at 7%-8% during 2022-2024;
– Capital intensity at 6% of revenue in 2021, and around 5% during 2022-2024;
– No major acquisitions during 2022-2024.
Fitch Ratings – Hong Kong – 28 Mar 2022: Fitch Ratings has assigned a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘BBB-‘ to Zhuhai Port Holdings Group Co., Ltd. (ZHPG). The Outlook is Stable.
ZHPG is a state-owned enterprise (SOE) fully owned by the Zhuhai Municipal Government. ZHPG’s ratings are derived from Fitch’s internal assessment of the creditworthiness of Zhuhai municipality, based on a top-down approach in line with our Government-Related Entities Rating Criteria. This reflects our assessment of the local government’s strong control and support record, and its strong incentive to support ZHPG.
ZHPG develops and operates Zhuhai port, the sole deep-water seaport in Zhuhai in southern China. It is also the exclusive licensed gas provider in Zhuhai. The Stable Outlook reflects our expectation that ZHPG’s operations will remain stable and government support will stay strong.
KEY RATING DRIVERS
Strong Control, Support Record: We assess ZHPG’s Status, Ownership and Control as ‘Strong’ as the Zhuhai government maintains full ownership and exerts strong control over ZHPG through Zhuhai State-owned Assets Supervision and Administration Commission (SASAC), which appoints the company’s board members and senior management, approves major investment and financing plans, and monitors operating and financial performance.
We also assess the Support Record as ‘Strong’ to reflect the consistent support received by ZHPG from the municipal government, including capital and zero-cost asset injections, subsidies, and policy backing.
Strong Incentive to Support: Fitch assesses the socio-political implications of a ZHPG default at ‘Strong’, because ZHPG is the sole developer and operator of Zhuhai port, the sole deep-water port in the city and the west bank of the Pearl River Delta. ZHPG is also the exclusive city gas provider and the company is appointed by the government to complete Zhuhai’s natural gas network.
Fitch assesses the financial implications of a default by ZHPG for the Zhuhai government as ‘Strong’. ZHPG is the third-largest local government-related entity (GRE) by asset size and by outstanding bond amount in Zhuhai at end-3Q21. A default will have negative impact on the creditability of Zhuhai city and impair access to funding by the city’s other GREs.
Diversified Business; High Leverage: Fitch assesses ZHPG’s Standalone Credit Profile (SCP) at ‘b’, supported by a diversified business but constrained by high leverage. ZHPG has good-quality port assets and a stable gas business that form its core operation, and entered other areas, such as new-energy manufacturing. Leverage, measured by net debt/EBITDA, rose to 16.5x by end-2020 from 13.9x at end-2019. Fitch estimates leverage to have peaked at 17.9x at end-2021 after debt-funded acquisitions in 2020-2021, before falling to 15x in 2023-2024 as ZHPG has completed its major investments.
Sufficient Financial Flexibility: ZHPG’s credit profile also supported by the group’s smooth and diversified funding access, and well-spread debt maturity profile. ZHPG enjoys ample unused bank facilities leveraging on its SOE background. ZHPG and its major listed subsidiaries are active bond issuers in onshore markets and bond issuances have proceeded smoothly. There is no concentration of ZHPG’s debt maturities in single year.
DERIVATION SUMMARY
ZHPG’s IDR of ‘BBB-‘ is notched from Fitch’s internal assessment of the credit profile of Zhuhai municipality under our Government-Related Entities Rating Criteria, due to the high likelihood of support from the local government. The rating gap is comparable with that of other municipal SOEs that perform certain public service roles, such as Shougang Group Co., Ltd (A-/Stable), which is owned by Beijing SASAC.
ZHPG’s linkages to the municipality are weaker than that for Zhuhai Huafa Group Co., Ltd. (BBB/Stable), the largest SOE under Zhuhai SASAC, reflecting ZHPG’s smaller scale and lower level of control by government, and weaker financial implication should it default. Huafa accounts for more than half of the total assets held by municipality-owned enterprises and is the largest onshore bond issuer among all local SOEs.
However, Fitch assesses ZHPG to have ‘Strong’ socio-political implication of default due to its critical role in providing public services related to the port and city gas. In comparison, the socio-political implications of a default by Huafa are ‘Moderate’ due to its involvement in urban development and commercial property, which face competition from the private sector.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
– Fitch assesses ZHPG’s SCP on a deconsolidated basis by excluding three newly acquired manufacturing companies;
– Deconsolidated revenue at CNY20 billion in 2021, and at CNY22 billion-24 billion during 2022-2024;
– EBITDA margin at 6.5% in 2021, and stay at 7%-8% during 2022-2024;
– Capital intensity at 6% of revenue in 2021, and around 5% during 2022-2024;
– No major acquisitions during 2022-2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– An upgrade of Fitch’s internal assessment of the creditworthiness of Zhuhai municipality;
– Strengthening of likelihood of support from Zhuhai government.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– A lowering of Fitch’s internal assessment of the creditworthiness of Zhuhai municipality;
– Weakening of likelihood of support from Zhuhai government.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity; Multiple Funding Channels: ZHPG, after deconsolidating the three newly acquired listed manufacturers, had CNY4.7 billion in unrestricted cash at end-September 2021. ZHPG also had ample unused bank facilities of CNY25.9 billion, benefiting from its local SOE status. The group’s cash on hand and unused bank facilities are sufficient to cover its short-term debt of CNY7.8 billion. ZHPG also enjoys easy access to equity markets through its listed subsidiaries, and it is an active issuer in onshore bond markets.
ISSUER PROFILE
ZHPG is strategically important in Zhuhai as it develops and operates Zhuhai port, the sole seaport in the city. It is also the exclusive licensed gas distributor in the city. ZHPG’s other businesses include advanced manufacturing, trading and shipping finance.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch assesses ZHPG’s financial profile after deconsolidating its three newly acquired listed subsidiaries, namely Tongyu Heavy Industry Co., Ltd (20.34%-owned by ZHPG), Qingdao Tianneng Heavy Industries Co.,Ltd (27.22%-owned by ZHPG), and Jiangsu Xiuqiang Glasswork Co., Ltd (7.5% indirectly owned by ZHPG), which ZHPG acquired during 2020-2021 and consolidated into the group’s financials. The deconsolidation is mainly due to the existence of substantial minority interests in the three companies.
DATE OF RELEVANT COMMITTEE
21 March 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Source: Fitch Ratings