September 27, 2017 / 9:03 AM / a year ago

Fitch Publishes Liangshan State-Owned Investment's 'BB+' Rating

(The following statement was released by the rating agency) HONG KONG, September 27 (Fitch) Fitch Ratings has published Liangshan State-Owned Investment and Development Co., Ltd.'s (LSID) Long-Term Foreign- and Local-Currency Issuer Default Ratings of 'BB+'. The Outlook is Stable. KEY RATING DRIVERS Links to Liangshan Yi Autonomous Prefecture: The ratings of LSID are credit linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of the Liangshan Yi Autonomous Prefecture (Liangshan). This is because Liangshan holds a majority stake in LSID, has strong control and oversight over the entity, and LSID's operations are of high strategic importance to the prefecture. As a result, there is a high likelihood the prefecture would extend extraordinary support to LSID, if needed. Legal Status Assessed at 'Mid-Range': LSID is a leading public-sector entity in Liangshan. It is registered as a wholly state-owned limited liability company under China's Company Law, which means it may file for bankruptcy and not all of its employees are civil servants. The State-owned Assets Supervision and Administration Commission of Liangshan (Liangshan SASAC), which is appointed by the prefectural government to supervise state-owned enterprises, owns 62% of LSID. The remaining 38% is owned by 10 county-level SASACs or treasuries. Under LSID's current legal status, any major decisions, such as appointment of board members, change in shareholding structure, or operating and financing plans, will require approval from Liangshan SASAC. Strategically Important to Prefecture: LSID is the sole financing and investment platform responsible for the prefecture's mineral product and hydro-electricity operation as well as transport and infrastructure construction. The prefectural government has also tasked LSID with boosting the economy and easing poverty. The company is the leader in the prefecture in facilitating resource mining, improving infrastructure, advancing the education level of minority groups, increasing access to the prefecture and enhancing the prefecture's competiveness by attracting external investments. Government Support for Entity: Liangshan's government has been supporting LSID via financial subsidies and capital and resource injections to ensure LSID is able to sustain its operations. Specific funds have been allocated to support LSID's poverty-alleviation policy role as well. In 2015 and 2016, Liangshan SASAC and the other shareholders injected assets and capital that made up 60% of LSID's increase in assets in 2015 and 13% in 2016. Strong Control and Oversight: Liangshan SASAC approves LSID's operating and financing plans, appoints and supervises its board members, and audits and monitors the company's performance. Liangshan's Creditworthiness: Liangshan is an autonomous prefecture occupying much of the southern extremity of Sichuan Province in southwestern China. Liangshan's economy is relatively small with a gross regional product (GRP) of CNY140.39 billion in 2016, which is below the average of all prefectures in Sichuan. However, GRP increased by 6% in 2016 and prospects are bright as the prefecture has been the focus of central and provincial government efforts to alleviate poverty. A significant portion of the prefecture's revenue comes from transfers from higher-level governments. Weak Standalone Profile: LSID's financial profile is characterised by high leverage due to large capex. Total debt/Fitch-calculated EBITDA averaged around 15x in 2014-2016. The ratio of FFO to debt and interest has been low; it averaged 0.08x in 2014-2016 due to weak operating cash flow. LSID's assets continue to grow rapidly as a result of continued asset injections from various government owners. Total assets rose 46% in 2016. Fitch expects the trend of high leverage, low debt coverage and rapid asset growth to continue in the medium term due to infrastructure development needs in the prefecture and the company's policy role to alleviate poverty. As such, Fitch assesses the standalone profile of LSID in the 'B' category. RATING SENSITIVITIES Links with Municipality: An upgrade of Fitch's internal credit view on Liangshan Prefecture, as well as a stronger or more explicit support commitment from the government may trigger positive rating action on LSID. Significant weakening of the entity's strategic importance to the prefecture, dilution of the prefecture's shareholding, or reduced explicit and implicit prefectural support may result in a downgrade. A downgrade may also stem from weaker fiscal performance or increased indebtedness of the prefectural government, leading to deterioration in its creditworthiness. Contact: Primary Analyst Janet Liu Associate Director +852 2263 9983 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Samuel Kwok Associate Director +852 2263 9961 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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