(The following statement was released by the rating agency)
Jan 18 -
Summary analysis -- China Merchants Holdings (International) Co. Lt 18-Jan-2013
CREDIT RATING: BBB/Stable/-- Country: China
Primary SIC: Paints and allied
Credit Rating History:
Local currency Foreign currency
17-Feb-2005 BBB/-- BBB/--
The rating on China Merchants Holdings (International) Co. Ltd. (CMHI)
reflects the company's stand-alone credit profile (SACP) of 'bbb'. We assess
the likelihood of timely and sufficient extraordinary government support to
CMHI to be "low" in the event of financial distress. We assess the company's
business risk profile as "strong" and its financial risk profile as
CMHI's SACP reflects the company's geographically diversified port portfolio
in China, strong market position, and above-average profitability. The SACP
also reflects CMHI's good record of disciplined financial management and
executing a strategy focused on its port business, which generates stable cash
flows. The company's complex corporate structure, reliance on dividends from
affiliates, moderately aggressive debt-funded expansion plan, and project
execution risk temper the above strengths.
CMHI has been pursuing domestic as well as overseas investment opportunities
to expand its port business. The company recently gained direct management and
control over Shenzhen Chiwan Wharf Holdings Ltd. This will facilitate the
integration of CMHI's ports in West Shenzhen and enhance the company's
competitiveness. We expect CMHI's acquisition of a 23% stake in operating port
assets in Djibouti in eastern Africa to contribute to its steady cash flow. We
also expect the company's investment in a 10% stake in Taiwan Kao Ming
Container Terminal to help cement its relationship with key clients.
Stable operating cash flow from the port business and disciplined financial
management have helped CMHI to maintain positive free cash flows.
Nevertheless, new investments have raised the company's capital needs and
could increase its total debt. CMHI has staggered its large capital
expenditure on projects such as the US$500 million Colombo port in Sri Lanka.
For projects operated under concession agreements, we treat the present value
of the concession payment as debt to reflect CMHI's obligations in these
In our opinion, CMHI's deconsolidation of China Nanshan Development (Group)
Inc. (CND) will enable the company to maintain stable financial metrics. CND
operates substantial non-port related businesses, such as property
development, which we view as more volatile and highly leveraged compared with
CMHI's port business.
Lower earnings from CMHI's 25%-owned container producer China International
Marine Containers (CIMC) could impact the group's operating income in
2012-2013. It is also likely to reduce CIMC's dividend payout to the group in
2013. CIMC contributed about 20% to CMHI's EBIT and 6% to its operating cash
flow in 2011.
We believe that CMHI has limited financial headroom for the rating. We
estimate that the company's cash flow adequacy ratios in 2012 may have
weakened from those in 2011, based on our view of: (1) flat growth of
container throughput in CMHI's ports in West Shenzhen; (2) an expected decline
of dividend from certain investments; and (3) higher gross debt by the end of
2012 due to an issuance of a 10-year US$500 million senior unsecured bond in
May. The debt level is likely to reduce following the repayment of a US$300
million bond due in 2013.
In our base-case scenario, we expect CMHI's ratio of funds from operations
(FFO) to debt to improve to 16%-20% over the next two years from that in 2012
because of lower debt and ongoing, albeit moderate, growth in cash flow. We
estimate CMHI's port operation to grow modestly during this time, reflecting
China's slowing economy, uncertain foreign trade, and subdued shipping market.
We consider CMHI to be a government-related entity. Our assessment of "low"
extraordinary government support reflects the company's "limited" link with,
and "limited importance" to, the government of China (AA-/Stable/A-1+;
cnAAA/cnA-1+). Our view is based on the following factors:
-- The CMHI group faces intense competition in its port operations. It
has minority stakes in most of its port projects, except its port assets in
-- The company has a long history of independent management and its
strategy has a limited public policy role. We believe the group's activities
are commercially driven.
We consider the majority holding of China Merchants Group Ltd. (CMG) in CMHI
to be a neutral rating factor. CMG holds 54.76% of CMHI as of Dec. 31, 2012.
CMG is a state-owned conglomerate with diversified interests.
CMHI's liquidity is "adequate," as defined in our criteria. The company's
liquidity sources should exceed its uses by more than 1.2x for the next 12
months. CMHI has surplus cash holdings and good cash flows from its port
operations and investments. Our liquidity assessment includes the following
factors and assumptions:
-- The company's near-term liquidity sources include cash and bank
deposits, FFO, and committed undrawn bank facilities. As of Dec. 31, 2012, we
estimate the group has a cash balance of about Hong Kong dollar (HK$) 4
billion and undrawn committed bank facilities of HK$15 billion.
-- Liquidity uses include near-term debt maturities, working capital
needs, committed capital expenditure and investments, and dividend
distributions. As of Dec. 31, 2012, we estimate CMHI has HK$7 billion
interest-bearing debt maturing in 12 months and committed capital expenditure
of HK$6.5 billion.
-- We believe CMHI's net sources of liquidity should remain positive and
the company could be in compliance with financial covenants even if EBITDA
declines by 15%.
-- The company has sound relationships with banks and has a good standing
in the capital market. It raised a 10-year US$500 million senior unsecured
bond in May 2012, US$300 million of which it will use to refinance debt
maturing in 2013.
The stable outlook reflects our expectation that CMHI's port business will
continue to grow moderately and generate largely stable cash flows. The
outlook also reflects our view that the company's logistics and cold chain
businesses will maintain strong growth momentum over the next two years. In
addition, we believe that CMHI will maintain financial discipline and properly
manage its project execution risk.
We could lower the rating if: (1) CMHI's container throughput, dividend from
investments, or profitability is significantly lower than we expected; or (2)
the company makes significant debt-funded investments that weaken its
financial strength. A consistent weakening of credit metrics, such as an
FFO-to-debt ratio of less than 15% or FFO interest coverage of 4x over the
next couple of years could trigger a downgrade.
In our view, any upward rating potential is limited over the next two years,
given our expectation that CMHI's cash flow will grow modestly and the company
will increase capital expenditure. We could, however, raise the rating if
CMHI's financial performance improves, such that its FFO-to-debt ratio is
consistently higher than 25%, while expanding its port business, and the
company reduces its reliance on dividends from affiliates.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Liquidity Descriptor For Global Corporate Issuers, Sept. 28, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008