November 9, 2017 / 12:10 AM / a year ago

Fitch Assigns XiangJiang Group First-Time 'BBB' Rating; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 08 (Fitch) Fitch Ratings has assigned China-based Hunan XiangJiang New Area Development Group Co., Ltd a Long-Term Foreign-Currency Issuer Default Rating of 'BBB' with a Stable Outlook. The company's rating is credit-linked to that of its sponsor, Changsha municipality, in light of tight control and consistent financial and operational support. We believe there is a great likelihood that XiangJiang Group would receive extraordinary government support, if needed. KEY RATING DRIVERS Legal Status Attribute Midrange: XiangJiang Group was established in 2016 as a limited liability company under the China's company law, stipulating that the government is not liable for guaranteeing the company from insolvency. XiangJiang Group is 100% owned by the State-Owned Assets Supervision and Administration Commission of Changsha Provincial People's Government (Changsha SASAC) and we do not expect any dilution in ownership. Strategic Importance Attribute Midrange: The State Council has approved XiangJiang New Area - a growth engine for Changsha municipality - as a state-level new area in 2015. XiangJiang Group plays a crucial role as the area's largest functional local-government funding vehicle, helping fund land development and social overhead capital (SOC) investments pursuant to the local government's development plan. This includes roads, bridges, power supply, schools, hospitals and cultural facilities. The company plans to carry out around 30% of total government investment in XiangJiang New Area in 2017. Integration Attribute Midrange: XiangJiang Group has consistently benefited from financial and operational government support. Nearly 98% of its revenue is derived from land development and SOC projects as well as consistent land transaction fee rebates associated with land development projects; 91% of the company's investments are government-related projects in 2017. Up to 34% of its debt is integrated into the sponsor's debt, implying support from the sponsor is likely in case of debt distress. Control and Oversight Attribute Stronger: XiangJiang Group's overall operation and project management is closely monitored by the Hunan Xiangjiang New Area Management Committee, which is entrusted with supervisory duties by Changsha SASAC. Changsha SASAC also monitors XiangJiang Group's public role and operation to ensure value enhancement of state-owned assets, appoints the entity's top executives and evaluates its performance. Weak Standalone Financials: XiangJiang Group's heavy capital expenditure and inventory has historically led to negative free cash flow, which we expect to continue in 2017 given steady inventory growth and low turnover. Its net debt/EBITDA rose to 23.8x, from 21.2x in 2015, due to a CNY3 billion bond issuance. EBITDA interest coverage was low at 0.7x, but we expect a gradual increase reflecting a gross profit-margin improvement. RATING SENSITIVITIES Credit-Linked with Sponsor: An upgrade of Fitch's credit view of the sponsor may trigger positive rating action on XiangJiang Group. Downgrade Triggers: A downgrade of the sponsor, a dilution of ownership, weakened government links to the company with respect to control and supports or a languishing importance of its public-policy role may result in the entity no longer being credit-linked to the sponsor, leading to negative rating action. Contact: Primary Analyst Ethan Lee Associate Director +852 2263 9912 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Lorraine Liu Associate Director +852 2263 9929 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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