(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 "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.
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$300 million bond due in 2013.
In our base-case scenario, we expect CMHI to maintain a ratio of funds from operations (FFO) to debt of about 15% and FFO interest cover of about 4x by the end of 2012. Its FFO-to-debt ratio is likely to improve to 16%-18% in 2013 because of lower debt and ongoing, albeit moderate, growth in cash flow.
We consider CMHI to be a government-related entity. Our assessment of extraordinary government support reflects the company's "limited" link with, and "limited importance" to, the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+). Our view is based on the following factors:
-- The group faces intense competition in its port operations. It has minority stakes in most of its port projects, except its port assets in West Shenzhen.
-- CMHI has a long history of independent management and its strategy has a limited public policy role. We believe the group's activities are commercially driven.
We consider the majority holding of China Merchants Group Ltd. (CMG; not rated) in CMHI to be a neutral rating factor. CMG holds 54.67% of CMHI as of Dec. 31, 2011. CMG is a state-owned conglomerate with diversified interests.
CMHI's liquidity is "adequate", as defined in our criteria. The company's liquidity sources should exceed its uses by more than 1.2x for the next 12 months. CMHI has surplus cash holdings and good cash flows from its port operations and investments. Our liquidity assessment includes the following factors and assumptions:
-- The company's near-term liquidity sources include cash and bank deposits, FFO, and committed undrawn bank facilities. As of June 30, 2012, we estimate the group has a cash balance of Hong Kong dollar (HK$) 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 capital expenditure.
-- 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. 9, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008