Fitch Assigns Sichuan Development 'A-' Rating; Outlook Stable
KEY RATING DRIVERS
Links to Sichuan Province: The ratings of SDH are credit linked to Sichuan Province, but not equalised with it. This is reflected in the provincial government's 100% ownership of SDH, strong government oversight of the company's financials, and strategic importance of the entity's operation to the province. These factors result in a high likelihood of extraordinary support, if needed. Therefore, SDH is classified as a credit-linked public-sector entity under Fitch's criteria.
Sichuan's Satisfactory Creditworthiness: Sichuan Province possesses a well-diversified socio-economic profile and strategic importance as a key province in western China. The central government's regular and sizeable transfers also strengthen the visibility of its fiscal performance, so the province's budget performance is widely considered satisfactory. Sichuan's credit strengths are counterbalanced by high contingent liabilities arising from its state-owned entities.
Strategic Importance Attribute Stronger: SDH is positioned as the sole provincial level state-owned capital operation enterprise that focuses on the exercise of special roles in infrastructure development and financing, resource security, state-owned capital operation and management, inviting investment to Sichuan, developing industrial clusters and promoting advancement of industries in Sichuan. It was the largest public-sector entity in terms of total assets at end-2015 in Sichuan Province.
Control Attribute Stronger: The board members of SDH are mainly appointed by the Sichuan provincial government, and major projects as well as investment and financing decisions require the government's approval. SDH's financing plan and debt levels are closely monitored by the province, and the company is required to report its operational and financial results to the provincial government on a regular basis.
Legal Status Attribute Mid-Range: SDH is registered as a state-owned limited liability company under Chinese company law. It is wholly owned by the Sichuan provincial government.
Integration Attribute Mid-Range: The provincial government continues to provide significant monetary support including, but not limited to, capital injections, subsidies and subsidised loans to support SDH's business, because it is a core functional public-sector entity in Sichuan. The fiscal support aims to partly fund SDH's capital expenditure and debt servicing. SDH also receives non-monetary government support that allows it to maintain robust long-term relationships with major banks, including policy banks and the five largest state-owned banks.
Financial Profile: SDH's financial profile in the past five years has been characterised by large capex, negative free cash flow and high leverage. Fitch believes this trend will continue in the medium term, driven by the ongoing infrastructure investments in Sichuan. However, perceived strong support from Sichuan Province could mitigate such risk.
Links with the Province: An upgrade of Fitch's internal assessment of the creditworthiness of Sichuan Province may trigger positive rating action on SDH. A significant weakening SDH's strategic importance to the province, dilution of the provincial government's shareholding, and/or reduced provincial government support, may result in a downgrade.
A downgrade may also stem from weaker fiscal performance or increased indebtedness of the province, leading to deterioration in its creditworthiness.