OREANDA-NEWS. Fitch Ratings has affirmed Anhui Transportation Holding Group Company Limited (AHTrans) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' with a Stable Outlook.

AHTrans' ratings are credit-linked but not equalised with Fitch's internal credit assessment of Anhui Province. The strong linkages are evident in the province's 100% ownership of the company and oversight of its financials; the financial support provided to the company by the province and via the Central Department of Transportation; its linkages with the Anhui Department of Transportation; and the overall strong strategic importance of company's operations to the province. We do not envisage any significant adverse change in relationship with Anhui Province over the foreseeable future.

Fitch has also affirmed the ratings at 'BBB+' for the USD300m 2.875% senior unsecured notes due 2018, issued by Anhui Transportation Holding Group (H.K.) Limited (AHTransHK) which is fully owned by AHTrans. The bond is rated at the same level as AHTrans' Long-Term IDR. This is because the keepwell deed, a deed of equity interest purchase undertaking, and a cross-border US dollar standby facility transfer the ultimate responsibility of payment to AHTrans.

KEY RATING DRIVERS
Strategically Important to Anhui: AHTrans' expressways play an important role within the logistic infrastructure of Anhui, a province that is a gateway for inland-bound economic activity due to its strategic location. Anhui had the largest cargo transportation volume among China's provinces during 2014. Fitch expects Anhui to continue to develop its role as a logistics hub because manufacturers based on the coast are increasingly seeking to relocate to central China, to trim costs and better serve customers.

Robust Regional Expressway Operator: AHTrans is Anhui Province's largest expressway operator, owning and managing 50 expressways and one national road spanning over 3,735km located in 16 cities across Anhui Province as of end-2015. These expressways represent 93% of the entire province's expressways. Traffic in 2015 remained robust with a 16% increase, leading to a 12% increase in expressway operation's EBITDA to CNY10.6bn (2014: CNY9.5bn).We expect EBITDA margins from expressway operations will remain stable at around 80% (overall EBITDA margins lower at around 45%, due to low-margin expressway-related operations such as real estate and logistics).

AHTrans will need to make substantial investments to further enhance the road network in the province. The company has 586km of expressways currently under construction and in the near-execution stage that are to be completed by end-2019. In addition, another 944km of projects are under consideration, and likely to be completed over the same time frame.

AHTrans also has ancillary businesses, such as service stations and gas stations along the expressways; logistic operations; and real estate development, while management has emphasised that the non-core business will gradually shrink as the focus will be on expressways operations. In addition, the merger in 2014 was aimed at improving the operating efficiencies for the province's expressways; hence, we expect the ancillary businesses would remain small.

Strong Linkage with Parent: Anhui Province's Department of Transportation works almost exclusively with AHTrans in designing, constructing and operating the province's expressway networks. The province aims to further develop the expressway networks; Fitch expects the department to continue to work closely with AHTrans because the company has the ability and incentive to make the upfront investment during the design phase of projects, and the necessary execution capacity. Fitch expects this to translate into a continued increase in AHTran's contribution to the province's expressway networks.

Strong Tangible Support: AHTrans has received significant tangible support for its contribution to the province's expressway infrastructure. AHTrans benefits from tax refunds (business taxes and corporate income taxes) and dividend refunds from the Anhui government; and it receives expressway construction subsidies from the central government's Department of Transportation. The tangible support appears as equity injections and other income in its financial statements.

The refund of these taxes remain uncertain following the introduction of a national value added tax (VAT) system which replaced the provincial business taxes in May 2016. However, refunded business taxes are not a significant amount relative to AHtran's scale and the total refunds and subsidies it receives; for example, business taxes refunded only amounted to CNY379m in 2014. Fitch expects the strong level of tangible support to be maintained in the short to medium term, based on the province's targets in further enhancing its logistics infrastructure.

Strong Access to Liquidity: Fitch expects AHTrans to continue to have access to liquidity, being the Anhui government's largest wholly owned enterprise and operating an infrastructure-related business.

Weak Standalone Financial Profile: The standalone financial profile ('B+') of the company has remained weak, with FFO fixed-charge cover and FFO net adjusted leverage at 1.4x and 11.0x, respectively, in 2015. The financial metrics are driven largely by the company's large capex programme, which has been partially financed by a sustained high level of tangible support from the government. In terms of debt structure, AHTrans aims to use its large cash reserve to reduce its reliance on short-term borrowings.

KEY ASSUMPTIONS
- Continued substantial tangible support from government
- Stable vehicle traffic growth (10% from 2016-2019F)
- Maintaining overall operating EBITDA margin above 40%
- Capex programme to continue to be large with over 80% spent on new expressways

RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include:

An upgrade of Fitch's credit view on Anhui province as well as stronger linkages between the company and Anhui province may lead to positive rating action on AHTrans.

Negative: Developments that may, individually or collectively, lead to negative rating action include:

Significant weakening of AHTrans' strategic importance to the province - including a dilution in AHtrans' role in the future provincial expressway development strategy, a significant dilution of the government's shareholding, and/or reduced explicit or implicit provincial support - may result in a downgrade.

A downgrade could also stem from a lowering of Fitch's internal assessment of Anhui's creditworthiness and its propensity to provide support; this may arise from a weaker fiscal performance or increased indebtedness of the province.