OREANDA-NEWS. Fitch Ratings has affirmed Power Construction Corporation of China's (PCCC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook on the IDR is Stable.

In line with the top-down approach in its Parent and Subsidiary Linkage rating criteria, Fitch has notched the IDR two levels below China's Long-Term IDR of 'A+' with Stable Outlook to reflect PCCC's strong operational and strategic ties with central government through its 100% parent, the State-owned Assets Supervision and Administration Commission (SASAC). The Stable Outlook reflects Fitch's expectation of continued state support for PCCC.

KEY RATING DRIVERS

Strategically Important: In 2015, PCCC maintained its leading position in China's clean energy engineering and construction (E&C) market, which supports its strong strategic and operational ties with the state. The company remains has an 80% share in the hydro power engineering market and 65% in the hydro power construction market by new contract value in China. In addition, it has 50% share of wind power engineering by new contract value in China.

Government Promotion of Clean Energy: The Chinese government has set several key targets for the clean energy sector in its 13th Five-Year Plan for 2016-2020, including raising the share of non-fossil fuels in primary energy consumption to about 15% by 2020, and 20% by 2030. The government targets to invest CNY2.3trn in clean energy in 2016-2020, 28% more than in the previous Five-Year Plan that covered 2011-2015. Hydro power and wind power, where PCCC is the leading E&C company, are the two principal sources of clean energy in China. Hydro power accounts for 68% of China's clean energy generation capacity, with wind power accounting for 22%.

New Contract Growth Outpaces Peers': PCCC's new contracts rose 13% in 2015, with domestic new contracts (accounting for 63% of the total) increasing 11% and international (accounting for 37% of the total) rising 17%. New contract growth slowed slightly from 14% in 2014, but it outperformed that of most other China E&C companies, whose new contracts rose by less than 10%. Thanks to its strong capability in securing contracts, PCCC had a backlog-to-revenue ratio of 3.2x by end-2015.

Lower Profitability: PCCC's revenue growth slowed to 8% in 2015 from 17% in 2014, primarily due to weaker construction activity in infrastructure. EBITDA margin narrowed to 8.4% in 2015 from 9.7% in 2014 due to lower profitability in international projects, which face intense competition. As a result, EBITDA declined 6% in 2015. We expect PCCC to maintain EBITDA margin in 2016 at the 2015 level, and increase revenue by 10%, driven by the resumption of infrastructure and property construction.

Higher Leverage: PCCC's FFO net leverage increased to 5.7x in 2015 from 4.5x in 2014, due to the lower FFO and the high capital requirements from its hydropower projects. We expect PCCC's leverage to remain high at 5.2x in 2016 before reducing in 2017 as EBITDA margin recovers.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Annual installed hydro power and thermal power capacity in China to be in line with the targets set out in the government's 12th Five-Year Plan

- Company's market position in China remains stable

- Development of build-transfer and build-operate-transfer projects at a stable pace

- Profitability in line with historical average

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Positive rating action on the Chinese sovereign

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

- Negative rating action on the Chinese sovereign

- Sustained weakening of the relative importance of hydraulic and hydro power E&C segment within PCCC