(The following statement was released by the rating agency)
July 31 -
Summary analysis -- China Merchants Holdings (International) Co. Lt 31-Jul-2012
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.
We expect average container throughput growth at CMHI's ports to fall to 5% in
2012-2013, from 9.6% in 2011. This is partly based on our base-case forecast
of 8.0%-8.2% real GDP growth in China in 2012-2013. In particular, growth in
the West Shenzhen ports, the home base of the group, is likely to be flat this
year. This reflects China's slowing economy, waning foreign trade, and subdued
shipping market. We estimate revenue growth at CMHI's port operation to be
flat or modest over the next 12-18 months. Revenues may rebound in early 2013
if the Chinese economy recovers strongly in the second half of 2012, which we
believe is likely.
Lower earnings from CMHI's 25%-owned container producer China International
Marine Containers (CIMC; not rated) 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 25% to CMHI's EBIT and 6% to its operating
cash flow in 2011.
In our view, an uncertain real estate market in China could affect the
property development business of China Nanshan Development Inc. (CNDI). CMHI
fully consolidates CNDI in its books. Thus the consolidation makes CMHI's
financial metrics appear more volatile than the intrinsic risk profile of its
ports business, in our view. Nevertheless, the potential for CMHI to achieve
synergies with CNDI's port and logistic businesses partly mitigates the
increased risks from CNDI over the mid- to long-term.
CMHI has controlled capital spending and costs while maintaining positive free
cash flows. Nevertheless, the group has been seeking investment opportunities,
both domestic and overseas. Its 85%-owned US$500 million Colombo port project
in Sri Lanka will raise its capital needs and could increase its total debt.
However, we understand CMHI will stagger the capital expenditure on this
project over the next five years. In addition, execution risk surrounds this
greenfield port project. We treat the present value of the minimum guaranteed
royalty and premium payable by this project under the build-operate-transfer
agreement as debt to reflect CMHI's obligations in this project.
We believe that CMHI will have less financial headroom at the current rating
level in 2012. This is because we expect the company's cash flow adequacy
ratios to weaken from that in 2011. We base our views on: (1) potentially flat
growth of container throughput in CMHI's ports in West Shenzhen; (2) an
expected decline of dividend from some major investments; (3) expected lower
cash flow contribution from CNDI; and (4) 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 next year following the repayment of a
US$300 million bond due in 2013.
In our base-case scenario, we expect CMHI to maintain a ratio of funds from
operations (FFO) to debt of about 15% and FFO interest cover of about 4x by
the end of 2012. Its FFO-to-debt ratio is likely to improve to 16%-18% in 2013
because of lower debt and ongoing, albeit moderate, growth in cash flow.
We consider CMHI to be a government-related entity. Our assessment of
extraordinary government support reflects the company's "limited" link with,
and "limited importance" to, the government of China (AA-/Stable/A-1+;
cnAAA/cnA-1+). Our view is based on the following factors:
-- The group faces intense competition in its port operations. It has
minority stakes in most of its port projects, except its port assets in West
-- CMHI has a long history of independent management and its strategy has
a limited public policy role. We believe the group's activities are
We consider the majority holding of China Merchants Group Ltd. (CMG; not
rated) in CMHI to be a neutral rating factor. CMG holds 54.67% of CMHI as of
Dec. 31, 2011. CMG is a state-owned conglomerate with diversified interests.
CMHI's liquidity is "adequate", as defined in our criteria. The company's
liquidity sources should exceed its uses by more than 1.2x for the next 12
months. CMHI has surplus cash holdings and good cash flows from its port
operations and investments. Our liquidity assessment includes the following
factors and assumptions:
-- The company's near-term liquidity sources include cash and bank
deposits, FFO, and committed undrawn bank facilities. As of June 30, 2012, we
estimate the group has a cash balance of Hong Kong dollar (HK$) 11.1 billion
and undrawn committed bank facilities of HK$13.6 billion.
-- Liquidity uses include near-term debt maturities, working capital
needs, committed capital expenditure and investments, and dividend
distributions. As of June 30, 2012, we estimate CMHI has HK$10.4 billion
interest-bearing debt maturing in 12 months, and HK$3.5 billion of committed
-- 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.
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 expectation that the company's logistics and cold
chain businesses will maintain strong growth momentum, and CNDI's property
business will contribute significant revenue to the group over the next two
years. In addition, we anticipate that CMHI will maintain financial discipline
and properly manage its project execution risk.
The rating on CMHI could come under pressure if the company's cash flow
adequacy measures remain weaker than our expectation of a minimum FFO-to-debt
ratio of 15% or FFO interest coverage of 4x over the next couple of years.
This could happen if: (1) CMHI's container throughput, dividend from
investments, or profitability is significantly lower than we expected; (2)
CMHI is unable to influence the financial management and leverage of CNDI and
the latter's actual property sales and outlook are materially weaker than
management's expectations; or (3) CMHI makes significant debt-funded
investments that weaken its financial strength.
In our view, any upward rating potential is limited over the next couple of
years, given our expectations of weaker financial metrics in 2012 and 2013.
Related Criteria And Research
-- China Merchants Holdings (International) Co. Ltd.'s Proposed
Guaranteed U.S. Dollar Notes Rated 'BBB', April 25, 2012
-- Liquidity Descriptor For Global Corporate Issuers, Sept. 28, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008