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Feb 18 (The following statement was released by the rating agency)
Fitch Ratings has affirmed China Railway Group Limited's (CREC) Long-Term Issuer Default Rating (IDR) at 'BBB+' and senior unsecured rating at 'BBB+'. The Outlook is Stable. Fitch also affirmed the USD500m 3.85% senior unsecured notes due 2023, issued by China Railway Resources Huitung Limited, at 'BBB+'.
KEY RATING DRIVERS
Strategic Position Unchanged: China's railway construction sector continued to be a duopoly in 2013 with CREC and China Railway Construction Corporation splitting the market. This supports CREC's strategic importance to China's infrastructure development, particularly in rail construction. During the period, CREC was awarded over 40% of China's railway and urban rail construction contracts. As of 30 June 2013, CREC had a contract backlog of CNY1.41tln (3.0 times of 2012 revenue; 81% of which are infrastructure construction contracts). The Chinese government has budgeted CNY630bn for railway fixed asset investment (FAI) in 2014, slightly higher than in the previous year, even after the restructuring in 2013 of the Ministry of Railway into Chinese Railway Corporation and a state railway administrator. Fitch expects Chinese railway and urban rail FAI to remain at similar levels for the next three or four years to build planned nationwide and regional rail transportation systems.
Positive Working Capital Drives Leverage: CREC's pre-construction and construction businesses exhibit a negative working capital pattern, although this has been largely weakened by the cash requirements for Build-Transfer/Build-Operate-Transfer operations and property development. As a result, CREC has positive working capital at the holding company level. Fitch expects this pattern to persist and drive up financial leverage, although this is mitigated by support from the Central State-owned Assets Supervision and Administration Commission (SASAC), which owns 100% of China Railway Engineering Corporation, the 56.1% parent of CREC.
Diversification Risk: SASAC has allowed CREC to expand into property development and other fields, which are more profitable but pose execution risks. These activities also drove up CREC's financial leverage. The debt used to support the capex and working capital requirements of activities in these sectors would be paid down once these projects generate cash flows, contributing to CREC's deleveraging.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Strengthening linkages between CREC and the Chinese sovereign
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the Chinese sovereign
- Weakening linkages between CREC and the Chinese sovereign