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June 30 (The following statement was released by the rating agency)
Fitch Ratings has affirmed China-based Shenzhen International Holdings Limited's
(SIH) Long-Term Issuer Default Rating (IDR) of 'BBB' with Stable Outlook. SIH is a medium-sized
infrastructure company with exposures to toll-road operations and logistics businesses. The
company is also a passive, minority investor in Shenzhen Airlines.
The rating and the Stable Outlook reflect SIH's stable cash generation from its
toll road operations, a financial profile appropriate for its 'BBB-' standalone
credit metrics and a single-notch uplift for implied support from its 48%
shareholder, the Shenzhen municipal government. However, the ratings are
constrained by material cash flow leakage arising from its main toll-road
holding company Shenzhen Expressway Company Limited. SIH holds 51% of Shenzhen
Expressway, whose assets are concentrated in Guangdong province. In addition,
SIH has been increasing investments in logistics operations, which inherently
carry higher business risks than toll-road operations.
KEY RATING DRIVERS
Robust Toll-Road Operations: The toll-road operations continue to be SIH's key
cash contributor, although we expect the proportion of cash contribution to SIH
from non-toll road operations to increase. In 2013, toll-road operations
accounted for over 80% of SIH's consolidated revenue and EBITDA. Despite
negative developments, such as waivers of tolls during national holidays, and
toll discounts for transporting agricultural goods and for certain vehicles
implemented in China, the segment revenue and EBITDA rose by 7.6% and 4.2%
respectively in 2013 due to traffic volume growth, a trend that continued into
the first quarter of 2014. Fitch believes the impact from the above regulations
are fully materialised and cash generation from the toll-road operations will
continue to be strong, driven by economic and car ownership growth in Shenzhen
and surrounding areas.
Material Cash Leakage: Fitch estimates that around 70% of the SIH's consolidated
cash flow is generated from its key toll-road operating subsidiary, Shenzhen
Expressway, which is not directly controlled by SIH. Shenzhen Expressway pays
out substantial dividends and SIH's share accounts for much of the company's
cash receipts. However, the large cash leakage to other shareholders of Shenzhen
Expressway is mitigated by the low debt at the SIH level and the stable nature
of the dividends. At end-2013, 85% of net consolidated borrowings of SIH were at
Shenzhen Expressway. Consolidated net debt excluding those of Shenzhen
Expressway/adjusted EBITDA (excluding EBITDA of, but including dividends
received from Shenzhen Expressway) ratio was just 1.7x at end-2013.
Diversification into Logistics Business: SIH is steadily expanding its footprint
into the logistics sector including logistic parks, logistic services and ports.
In 2013, the capacity of the logistics parks operated by SIH increased by 24%.
Furthermore, the company has signed five new investment agreements for "China
Urban Integrated Logistics Hub" projects in locations with good transportation
infrastructure and active economic activity. In Fitch's view, these investments
are aligned with the company's strategic focus on infrastructure investments,
but entail higher risks relative to its toll-road operations.
Focus on Infrastructure Investments: In 2013, SIH disposed of 11.34m listed
shares of CSG Holding Co., Ltd and all its equity interest in Shenzhen Capital
Group Co. Ltd, realising a total gain of HKD236m after tax in order to focus its
resources on the infrastructure businesses. In addition, the 49% stake in
Shenzhen Airlines is viewed as a passive investment. SIH does not expect to make
future capital investments in Shenzhen Airlines or provide other financial
support to it. Air China, the country's largest carrier, owns the other 51% of
Shenzhen Airlines and is more responsible for Shenzhen Airlines' operations and
Support from Shenzhen Government: SIH has received tangible support from the
Shenzhen State-owned Assets Supervision and Administration Commission (SASAC) in
the past, including a capital injection with the conversion of HKD1.7bn
convertible notes into SIH equity in 2010 and the extension of the maturity of a
CNY863m shareholder loan in 2008. Fitch has limited the rating uplift to one
notch because SIH is operated largely as a commercial entity, which is reflected
in its robust 'BBB-' standalone rating, and is less reliant on state support
than a typical government policy vehicle.
Negative: Future developments that may individually or collectively lead to
negative rating action include
- Material weakening in the operating or financial risk profile of SIH, such as
large debt funded investments in businesses of a higher risk profile than its
established toll-road operations or a material cash call by Shenzhen Airlines
that is not fully met by new equity. This may be reflected in SIH's consolidated
funds from operations (FFO)-adjusted net leverage rising above 5x on a
consolidated basis (end-2013: 3.1x) and/ or adjusted interest coverage, as
measured by consolidated EBITDA of SIH excluding EBITDA of Shenzhen Expressway
but including the dividends from Shenzhen Expressway to total consolidated
interest expenses of SIH excluding the total interest expenses of Shenzhen
Expressway falling below 4.0x (2013: 4.2x) on a sustained basis.
- Material adverse development at Shenzhen Expressway that would impact SIH's
ability to access operating cash flows - such as tighter debt covenants at the
- Weakening of linkages between SIH and the Shenzhen municipal government
Positive: Future developments that may individually or collectively lead to
positive rating action include
- Strengthening of linkages between SIH and the Shenzhen municipal government.
Fitch does not expect any material improvement in the standalone rating profile
of SIH in the short to medium term.