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Fitch Affirms Yunnan Provincial Investment at 'BBB+'/Stable
March 16, 2017 / 7:31 AM / in 9 months

Fitch Affirms Yunnan Provincial Investment at 'BBB+'/Stable

(The following statement was released by the rating agency) HONG KONG, March 16 (Fitch) Fitch Ratings has affirmed Yunnan Provincial Investment Holdings Group Co. Ltd.'s (YIG) Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB+' with a Stable Outlook. The issue ratings on YIG's senior unsecured US dollar bonds are also affirmed at 'BBB+'. KEY RATING DRIVERS Links to Yunnan Province: YIG's ratings are credit-linked to Yunnan province. This is reflected in YIG's 100% state ownership, strong provincial financial oversight and the strategic importance of its operation to the entire province. These factors result in a likelihood of extraordinary support from the provincial government, if needed. Therefore, YIG is classified as a credit-linked public sector entity under Fitch's criteria. Healthy Creditworthiness: Yunnan province has a healthy budget underpinned by strong central government support via China's robust fiscal equalisation system. Central government transfers remain an important part of Yunnan's total fiscal revenue. The province's annual fiscal revenue totalled around CNY500 billion in 2015, of which more than half consisted of central government transfers. The province's economy focuses on tobacco, metallurgy, coal mining, tourism and agriculture and its gross regional product expanded by 8.7% in 2016, despite a nation-wide economic slowdown. Legal Status 'Mid-Range': Legal status is assessed at mid-range, as YIG is allowed to become bankrupt and its employees are not all civil servants. Strategic Importance 'Mid-range': YIG is Yunnan province's important investment holding platform. The entity manages a diversified portfolio with social and economic purposes, including investments in healthcare, technology, property development, manufacturing and transportation. YIG also holds stakes in key Yunnan financial institutions on behalf of the government. The lack of full flexibility in managing these investments demonstrates the close linkage between YIG and Yunnan province. Integration 'Mid-range': Yunnan province injected CNY13.9 billion into YIG through subsidies and capital injection between 2010 and 2015. YIG received another CNY3.2 billion in capital injections in 2016, which are mainly used to fund Yunnan province's railway development by a key subsidiary of YIG. Fitch expects government support to continue as YIG shoulders an increasing amount of non-profit public service work. Control and Oversight 'Stronger': Yunnan province is the sole shareholder of YIG. The provincial government deliberates and decides on YIG's strategic development through the entity's board of directors to ensure it is in line with the province's overall development plan. The province exerts tight control over YIG's projects to strike a balance between economic and social return. Balancing Policy and Commercial Objectives: One of YIG's core functions is to incubate investments in new industries Yunnan province seeks to develop. When these investments mature, YIG exits them and recycles the capital into new projects that support the province's economic development. YIG makes these investments in close consultation with the government to determine their commercial viability and social benefits. Diversification Mitigates Geographic Concentration: YIG's portfolio is diversified across different industries. Fitch believes such diversification mitigates the risk of geographic concentration, as YIG primarily invests in Yunnan province in line with the provincial government's development plans. 'B' Standalone Credit Profile: The public-service nature of YIG's business means profit maximisation is not its goal. The standalone credit profile of YIG is in the 'B' category, which is weaker than the current rating. However, the strong strategic link with Yunnan province and YIG's strategic role in implementing the province's economic and infrastructure development could lead to a high level of extraordinary government support, if needed. RATING SENSITIVITIES An upgrade of Fitch's internal credit view on Yunnan province as well as a stronger or more explicit support commitment from the province may trigger positive rating action on YIG. Significant weakening of YIG's strategic importance to the province, dilution of the province's shareholding or lower explicit and implicit provincial support may result in a downgrade. A downgrade could also stem from a weaker fiscal performance or increased indebtedness of the province, leading to deterioration in Fitch's internal assessment of the sponsor's creditworthiness. Primary Analyst Lorraine Liu Analyst +852 2263 9929 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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 _id=1020633 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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