October 30, 2017 / 3:35 AM / a year ago

Fitch Affirms Beijing Capital Group at 'BBB'; Outlook Remains Negative

(The following statement was released by the rating agency) HONG KONG, October 29 (Fitch) Fitch Ratings has affirmed Beijing Capital Group Company Limited's (BCG) Long-Term Foreign-and Local-Currency Issuer Default Rating (IDR) at 'BBB'. The Outlook remains Negative. Fitch has also affirmed the senior unsecured rating and the rating on BCG's outstanding bonds at 'BBB'. A full list of rating actions is at the end of this commentary. BCG's rating incorporates a two-notch uplift due to its strong linkage with its parent, the State-owned Assets Supervision and Administration Commission (SASAC) of Beijing's municipal government, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. BCG's standalone credit profile is based on the weighted-average credit profile of BCG's three core business segments - property, infrastructure and environment protection - and the holding company's (holdco) financial strength. Fitch revised the Outlook on BCG's ratings to Negative in October 2016 to reflect that its financial profile would weaken if it was not supported by sustained realisation of its property assets. The company has had minimal success in reducing debt and BCG holdco's net debt has continued to rise to CNY28.9 billion at end-1H17 from CNY28.1 billion at end-2016 and CNY27.7 billion at end-2015. However, BCG remains on target to cut debt by end-2017 and it has listed its subsidiary Tianjin Beijing Expressway Co., Ltd for sale; the transaction for which may be completed in 2018. Furthermore, BCG's Daxing social housing project has moved on to its second phase of sales. These developments continue to support BCG's current ratings. The Negative Outlook reflects continued weakness in BCG's cash income-to-gross interest cover ratio, a key measure of the holdco's financial strength. The ratio was 0.9x in 2016. We do not expect the cash income from the Daxing project to increase sufficiently to improve the BCG holdco's interest cover to above 2.0x in 2017. The rating may be downgraded if BCG fails to improve the ratio to above 2.0x from 2018. KEY RATING DRIVERS Interest Coverage Still Weak: The BCG holdco has yet to reduce its debt sufficiently to lower its interest expenses, while the increase in the holdco's cash income will take time to improve. BCG's cash income may improve materially if the increase in the pace of development of the Daxing social housing project can be sustained. The Tianjin land parcels, which are in the planning stage, will also enhance the BCG holdco's cash income when they start development and presales in the years to come. These developments, together with the improving performance of its core subsidiaries, may allow the BCG holdco to generate a higher cash income-to-interest expense ratio of above 2.0x from 2018. Environment Protection Expansion Aggressive: BCC has made large acquisitions after its HK-listed subsidiary Capital Environment Holdings Ltd (CEHL) purchased a New Zealand waste-management project in 2015. In addition, BCC is committed in public-private partnership (PPP) projects, which resulted in capex remaining high in 2016 and 1H17. This kept BCC's FFO adjusted net leverage high at 11.5x and its FFO fixed-charge coverage at 1.7x at end-2016, which were broadly comparable to that of peers in the 'B' rating category, such as Gansu Province Electric Power Investment Group Corporation (BBB-/Stable; standalone mid-B category) and Yunnan Provincial Energy Investment Group Co., Ltd. (BBB/Stable; standalone B-). However, water utilities and waste management are generally more stable businesses compared with power generation, especially as independent power producers face tariff pressure and high fuel costs currently. Infrastructure Investment Underway: This business segment will consist mainly of Beijing MTR Corporation Limited, following the planned disposal of Tianjin Expressway by 2018. Beijing MTR, which operates two subway lines in the Chinese capital, is currently investing to build the new Beijing Line 16, which will continue to put pressure on its financial profile, especially between 2017 and 2019. We expect Beijing MTR's leverage to reduce to around 4.5x and fixed-charge coverage to rise above 5.5x once Line 16 is fully operational. Beijing MTR has available bank facilities of CNY18 billion that will be sufficient for its capex needs. Property Segment Improvement Takes Time: Fitch continues to assess BCG's property segment on a consolidated basis. We used a conservative valuation for BCG's land not held under BCL to derive segment leverage (net debt/adjusted inventory) of between 40% and 45%. BCG owns 41 million sq m of land in Daxing, Beijing and Tianjin. Only a fraction of land in Daxing has been approved for development while the 38 million sq m of land in Tianjin will require lengthy primary land development. Fitch will not treat the distribution from these non-commercial development operations as sustainable dividend income to BCG until the projects become mature townships. BCL's business profile is in the 'BB' category but its ratings are constrained at 'B+' because of its high leverage. The consolidated property segment of BCG, however, has lower leverage as it includes the large land bank. This consolidated leverage is only slightly higher than that of Sino-Ocean Group Holding Limited (BBB-/Stable, standalone BB/Stable) and Yuexiu Property Company Limited (BBB-/Stable, standalone BB/Stable). The business profile of the BCG property segment is also stronger than these two peers' as the non-BCL projects are more profitable and its land bank is much larger than that of the two peers. Moderate Government Support: BCG's ratings continue to benefit from a two-notch uplift due to its moderately strong linkage with the Beijing municipal government. BCG acts as an aggregator of private capital to be channelled towards investment in public goods, such as subways, environmental facilities and primary land development in the greater Beijing region, as well as financial services, such as government-guaranteed loans for Beijing's small-to-medium enterprises and agriculture businesses. DERIVATION SUMMARY BCG's standalone credit profile is assessed at 'BB+'/Negative, which is based on the weighted-average credit profile of BCG's three core business segments: property, infrastructure and environment protection. The standalone rating encompasses a high 'BB' category for the consolidated property segment (including land in Daxing and Tianjin held through BCG's wholly owned subsidiaries, as well as BCL), a low 'BBB' category for the infrastructure segment, and a high 'B' category for the environment-protection segment. BCG's diversified businesses in property and utilities-type public-services are comparable to those of the large Hong Kong conglomerates like Swire Pacifc Limited (A-/Stable) or CK Hutchison Holdings Limited (A-/Stable). However, it lacks the strong capital base of these peers, which had been built in mature stable business environments over long periods of time. BCG's subsidiaries are generally rated in the 'BB' to 'BBB' range, unlike these peers, whose subsidiaries are rated in the 'A' category. BCG's final rating of 'BBB'/Negative includes a two-notch uplift based on a bottom-up approach in accordance with Fitch's Parent and Subsidiary Linkage criteria; reflecting its moderately strong operational and strategic linkage with the Beijing municipal government. The government linkage is comparable with that for Beijing Capital Development Holding (Group) Co., Ltd. (BBB-/Negative), which also received a two-notch uplift. However, the linkage is weaker than that for Beijing Automotive Group Co Ltd (BAIC Group, BBB+/Stable), which enjoys a three-notch uplift, because the auto industry is a pillar industry of the city. BAIC Group is Beijing's largest tax-payer and employs over 100,000 people, the majority being local residents. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Assumptions used in the rating case for BCL are used in BCG's rating case. - Beijing MTR's revenue to increase by 10% a year in 2017-2019, and its capex to be debt funded. - BCC revenue to grow by 8% in 2017-2019 and its capex sustained at an average of CNY6 billion a year. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - BCG's Outlook may revert back to Stable if the holdco achieves material reduction in its debt in 2018 and its cash income-to-interest expense ratio increase above 2.0x; provided there are no deterioration of the credit profiles of BCG's three core subsidiaries - Stronger linkage with Beijing SASAC Developments That May, Individually or Collectively, Lead to Negative Rating Action - BCG holdco fails to materially reduce its debts in 2018 - BCG holdco's cash income-to-interest expense ratio sustained below 2.0x - Deterioration of the credit profiles of BCG's three core subsidiaries - Weaker linkage with Beijing SASACC LIQUIDITY Sufficient Liquidity: Fitch expects BCG to have sufficient liquidity to service its interest expenses at the holdco level, given CNY57 billion in undrawn committed bank facilities as of end-March 2017. The dividends continue to be lower than the interest expenses at the holdco level, although BCG has bank facilities and lending to subsidiaries that it can call back to meet its liquidity needs. The major use of funds other than for debt servicing is for potential acquisitions. Such acquisitions are usually discussed at length with the banks and Beijing SASAC to ensure funding is in place before the whole acquisition goes ahead. FULL LIST OF RATING ACTIONS Beijing Capital Group Company Limited - Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable - Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable - Senior unsecured rating affirmed at 'BBB'. Issued by Beijing Capital Polaris Investment Co., Ltd. and guaranteed by BCG - USD600 million 2.875% senior notes due 2018 affirmed at 'BBB'. Issued by Rosy Capital Global Limited with keepwell from BCG - CNY1.3 billion 5.25% senior notes due 2018 affirmed at 'BBB'. Issued by Central Plaza Development Ltd with keepwell from BCG - USD400 million 3.875% senior notes due 2020 affirmed at 'BBB'. - USD100 million 3.7% senior notes due 2020 affirmed at 'BBB'. In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome. Contact: Primary Analyst Su Aik Lim Senior Director + 852 2263 9914 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Hybrid securities totalling CNY7 billion are treated as 100% debt; - Payable and non-controlling interest totalling CNY11.3 billion added to debt, not counting the hybrid securities; - Land appreciation tax is excluded from operating cost and added to provision for tax; - Capitalised interest in cost of sales is deducted from operating cost Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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