OREANDA-NEWS. Fitch Ratings has affirmed Zhuhai Huafa Group Co., Ltd's (Huafa) Long-Term Foreign - and Local-Currency Issuer Default Ratings at 'BBB' with a Stable Outlook.

The agency also affirmed the 'BBB' rating of Huarui Investment Holding Company Limited's (Huarui) CNY1.5bn 5.25% senior unsecured bonds due 2018, which are unconditionally and irrevocably guaranteed by Huafa.

Huafa's ratings are credit-linked with, but not equalised to, Fitch's internal credit assessment of Zhuhai Municipality. This is due to Huafa's 100%-municipality ownership, strong municipal oversight of Huafa's financials and the strategic importance of Huafa's public-sector business to the municipality. These factors suggest a strong likelihood of extraordinary support from the municipality for Huafa, if needed.

KEY RATING DRIVERS

Zhuhai's Solid Creditworthiness: Zhuhai Municipality has a satisfactory budget performance, diversified socio-economic profile and is strategically important, as highlighted by its inclusion in several national-level economic zones, including the Zhuhai Free Trade Zone and China (Guangdong) Pilot Free-Trade Zone. These strengths are partially mitigated by its relatively small economic size and contingent liabilities arising from Zhuhai's state-owned entities.

Legal Status Attribute Mid-Range: Huafa is registered as a wholly state-owned limited liability company under Chinese law and the Zhuhai State-Owned Assets Supervision and Administration Commission (SASAC) has full control over Huafa. Legally, the public-sector entity can be liquidated or made bankrupt and employees are not civil servants. The government has advised it does not plan to dilute its shareholding in Huafa.

Strategic Importance Attributes Stronger: Huafa plays an important role in implementing the government's urban planning and development blueprint. The company helps the municipality with large-scale social-housing projects and urban developments, such as the Shizimen Central Business District. Huafa also owns majority shares in Zhuhai Financial Investment - a key municipality-owned investment holding platform for financial institutions and industrial-equity investment.

Control Attributes Stronger: Wholly owned by municipality, Zhuhai SASAC has decision-making power over Huafa's major investment and financing choices. Huafa's board of directors are mostly appointed by the municipal government, which also closely monitors its financing plan and indebtedness levels. In addition, Huafa is required to regularly report its operational and financial results to the municipality.

Government Integration attributes Midrange: Huafa's financials are not consolidated into the government budget, but the government has provided the company with significant capital injections and subsidies. Huafa's parent-level received capital injections totalling approximately CNY6bn from municipality to support its urban development operation between 2012-2015, accounting for around 27.4% of parent-level capex during this period. In addition, the municipal government has authorised Huafa to conduct primary land development in large-scale urban development projects, which accounted for an average of 17% of group revenue and 33% gross profit over the previous three years.

Rapid Expansion Increasing Risk: The company's ambitious expansion plans have increased its execution risk and financial burden. Huafa's property business could also potentially be exposed to cyclical fluctuations and sector-characteristic volatility. Nevertheless, Fitch believes the risks are limited, as Huafa only owns 27.23% of its listed property arm.

RATING SENSITIVITIES

An upgrade of Fitch's credit view on Zhuhai Municipality, as well as a stronger or more explicit support commitment from the municipality, may trigger positive rating action on Huafa.

Rating Downgrade: Significant weakening of Huafa's strategic importance to the municipality, dilution of the municipality's shareholding, and/or reduced explicit and implicit municipality support, may result in a downgrade. A downgrade could also result from the municipality's weaker fiscal performance or increased indebtedness, leading to deterioration in its creditworthiness.