S&P: Hong Kong and China Gas 'A+' And 'cnAAA' Ratings Affirmed On Stable Operational Performance; Outlook Stable
"We affirmed the ratings because we expect continuous organic growth in HKGC's utility business in China, reduced capital expenditure (capex), and potential recovery in its upstream oil business over the next two years," said S&P Global Ratings credit analyst Vincent Chow.
As such, we estimate that HKCG's ratio of funds from operations (FFO) to debt will recover to 36%-38% during 2016-2018 versus 34.5% in 2015. We continue to assess the company's financial risk profile as modest.
HKCG's gas utility business in China has been affected by the weak economy and reduced overall competitiveness of natural gas while oil prices remain low. However, we expect the volume growth of gas sales to recover versus 2015 after the cut to prices of city gate gas in November 2015, which improved the competitiveness of natural gas versus alternative energy.
We estimate that capex and acquisition costs during 2016-2018 will be Hong Kong dollar (HK$) 5 billion annually, compared with HK$6.6 billion in 2015. The reduction in capex mainly comes from new energy business. We expect HKCG to take a more prudent stance toward evaluating new projects, given the weak economy and low oil prices.
HKCG's strong cash and liquid investments help to underpin the company's credit profile. As of end-December 2015, the company has HK$13 billion in cash and time deposits.
"The stable outlook reflects our expectation that HKCG will benefit from its strong and stable Hong Kong core gas business, grow its city gas business in China, and achieve effective cost pass-through over the next two years," said Mr. Chow.
We also expect HKCG to continue its measured approach to developing its new energy business in China and executing prudent financial policy to manage its leverage. The company's increasing exposure to the new energy business is likely to increase volatility in cash flows.
We could lower the rating on HKCG if:Regulatory risks increase in Hong Kong or China--such that the company cannot pass-through costs--and adversely affect HKCG's profitability and cash flows; or HKCG adopts more aggressive growth strategies, such as taking on significant debt to finance new projects or expanding into new energy business more than we expected. A ratio of FFO to debt below 35% or negative free cash flow on a sustained basis will indicate such deterioration. Over the longer term, an increase in HKCG's exposure to China would put pressure on its business risk profile, unless it is accompanied by significantly improved financial strength.
In our view, an upgrade is less likely over the next 24 months, given HKCG's increasing exposure to China and the volatility in its new energy business.