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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 capital requirements.
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 project level
- 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.