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Fitch Rates China State Construction Engineering's USD Notes Final 'A'
July 4, 2017 / 3:05 AM / 5 months ago

Fitch Rates China State Construction Engineering's USD Notes Final 'A'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, July 03 (Fitch) Fitch Ratings has assigned CSCEC Finance (Cayman) II Limited's (CSCEC Finance II) USD500 million 2.90% notes due 2022 and USD500 million 3.50% notes due 2027 final ratings of 'A'. The notes are issued by CSCEC Finance II, and unconditionally and irrevocably guaranteed by China State Construction Engineering Corporation Ltd (CSCECL; A/Stable). CSCEC Finance II is a 100%-owned subsidiary of CSCECL. The notes are rated at the same level as CSCECL's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 21 June 2017. KEY RATING DRIVERS Ratings Reflect State Ties: Fitch has notched CSCECL's IDR three levels above its standalone assessment of 'BBB', to reflect CSCECL's moderate operational and strategic ties with the central government through its 56.26% parent China State Construction Engineering Corporation (CSCEC), which is wholly owned by the State-owned Assets Supervision and Administration Commission. In assigning the standalone rating, Fitch analysed CSCECL's financials after deconsolidating its property development subsidiary, China Overseas Land & Investment Limited (COLI; A-/Stable). Market Position Unchanged: CSCECL's market position and its leadership in different construction segments have remained unchanged and continue to be supported by its linkages to China's central government. CSCECL was involved in building 85% of the medium to large airports in China and 90% of the super high-rise buildings, which are more than 300 metres tall, in the country. CSCECL is one of only two companies qualified to construct nuclear islands, and one of five licensed to build railways in China. Robust Backlog-to-Revenue Ratio: CSCECL's ratio of order backlog to revenue has remained at an average of around 3.0x in the recent three years, which adds a degree of visibility to its revenue and EBITDA. CSCECL's new contract growth accelerated to 24% in 2016. In particular, housing construction - which accounts for about 69% of the new contracts - increased by 8%, and infrastructure construction (accounting for 31%) increased by 83%. We expect new-contract growth in housing construction to slow in 2017 amid a government clampdown on property investment, and in infrastructure to remain high, driven by public-private partnership (PPP) investment. Solid Performance in 2016: CSCECL's revenue (deconsolidated) increased by 12% in 2016, compared with a 9% rise in the previous year. This was mainly driven by strong growth of 23% in infrastructure sales. Its EBITDA (deconsolidated) margin remained stable at around 5%. PPP Projects to Drive Growth: The Chinese government has been encouraging the PPP model over the past two years. The Ministry of Finance recently approved the third batch of pilot PPP projects, which will invest a total of CNY1.2 trillion, 80% more than the second batch. We believe PPP projects will continue to be the main stimulus of new contract and revenue growth for the company. DERIVATION SUMMARY Fitch has notched CSCECL's IDR three levels above its standalone assessment of 'BBB', to reflect CSCECL's moderate operational and strategic ties with the central government. CSCECL is the largest construction company in China with leadership positions in different infrastructure and housing construction segments. It has a monopoly in aerospace construction, and is also the largest social-housing builder in China. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer (after deconsolidating COLI) include: - Revenue increases at around 10% annually in the next three years - Capex maintained at CNY11 billion annually in the next three years - Operating EBITDA margin maintained at 5%-5.5% in the next three years RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - EBITDA margin sustained above 7% (after deconsolidating COLI) - Sustained net cash position (after deconsolidating COLI) Developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage sustained above 3x (2015: 1.7x) (after deconsolidating COLI) - EBITDA margin sustained below 4% (after deconsolidating COLI) - Weakening linkages between CSCEC and the Chinese sovereign LIQUIDITY CSCECL had CNY321 billion of cash and equivalents and CNY570 billion of unused banking facilities at end-2016. Total debt was CNY368 billion, including CNY93 billion of short-term debt. Contact: Primary Analyst Roy Zhang Director +852 2263 9979 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Stella Wang Associate Director +86 21 5097 3026 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 20 October 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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