(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 “significant.”
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 projects.
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$300 million bond due in 2013.
In our base-case scenario, we expect CMHI’s ratio of funds from operations (FFO) to debt to improve to 16%-20% over the next two years from that in 2012 because of lower debt and ongoing, albeit moderate, growth in cash flow. We estimate CMHI’s port operation to grow modestly during this time, reflecting China’s slowing economy, uncertain foreign trade, and subdued shipping market.
We consider CMHI to be a government-related entity. Our assessment of “low” extraordinary government support reflects the company’s “limited” link with, and “limited importance” to, the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+). Our view is based on the following factors:
-- The CMHI group faces intense competition in its port operations. It has minority stakes in most of its port projects, except its port assets in West Shenzhen.
-- The company has a long history of independent management and its strategy has a limited public policy role. We believe the group’s activities are commercially driven.
We consider the majority holding of China Merchants Group Ltd. (CMG) in CMHI to be a neutral rating factor. CMG holds 54.76% of CMHI as of Dec. 31, 2012. CMG is a state-owned conglomerate with diversified interests.
CMHI’s liquidity is “adequate,” as defined in our criteria. The company’s liquidity sources should exceed its uses by more than 1.2x for the next 12 months. CMHI has surplus cash holdings and good cash flows from its port operations and investments. Our liquidity assessment includes the following factors and assumptions:
-- The company’s near-term liquidity sources include cash and bank deposits, FFO, and committed undrawn bank facilities. As of Dec. 31, 2012, we estimate the group has a cash balance of about Hong Kong dollar (HK$) 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. 9, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008