Fitch Affirms Binhai Investment at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Binhai Investment Company Limited's (BHI) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of 'BBB-'. The Outlook is Stable. Fitch has simultaneously affirmed BHI's senior unsecured rating along with the rating on its USD200m senior unsecured bonds due 2018 at 'BBB-'.
BHI's IDR incorporates a two-notch uplift for potential support from its immediate parent, TEDA Investment Holding Company Ltd (TEDA), which owns 59.29% of BHI on a fully diluted basis, and its ultimate parent, the Tianjin municipality. TEDA is wholly owned by the Tianjin municipality. BHI's standalone 'BB' rating reflects the quality of its city gas operations, its expected credit metrics, which are appropriate for this rating level, and its operating environment, including the risks stemming from the geographic concentration of its operations.
KEY RATING DRIVERS
Small, Geographically Concentrated Operations: The 'BB' standalone rating of BHI reflects the scale and concentration of BHI's operations in the Tianjin area, which accounts for around 60% of BHI's revenue. BHI's operating and financial scale is significantly smaller than other Chinese city gas operators rated in the 'BBB' category. In 2015, BHI generated HKD484m of operating EBITDA and sold approximately 561.7 million cubic metres of natural gas. Notwithstanding this, the company continues to increase its connections and gas sales volumes. In 2015, the company increased its gas sales volumes by 15%. Although this was slower than previously expected, it was stronger than the average seen across China.
Competitive Landscape in Tianjin: Unlike most other Chinese cities, Tianjin does not award the city gas operations to a single operator; consequently, any city gas provider can apply to start operations. In practice, Tianjin's city gas market operates under a duopoly between Tianjin Gas and BHI.
The duopoly is unlikely to change into a highly competitive market as the two major operators are controlled by the Tianjin government. In addition, around 30% of BHI's gas volume is sold to TEDA group companies. The continuation of such a benign competitive environment in Tianjin is critical to the 'BB' standalone rating of BHI.
Ability to Pass-through Costs: The ability to pass through gas cost increases stems from the government's aim to increase the share of natural gas in China's energy mix. Fitch does not expect a material contraction in the profitability of the gas supply business in the medium term as the agency believes the operators have a reasonably good ability to pass-through cost increases, although there may be some time lag. In 2015, EBITDA contribution from sale of gas and that from high-margin connections fees were broadly similar. We expect the share of EBITDA from the more stable, albeit lower-margin, gas sales to increase as we have seen with other mature city gas operators in China.
USD Bond Forex Risk: The USD200m bond due in 2018 represents over 75% of BHI's total debt obligations. This exposes the company to a higher degree of risk from any weakening of the Chinese yuan.
Improving Financial Credit Metrics: Fitch's forecast financial credit metrics for BHI are adequate for its standalone rating of 'BB'. Unless there is a significant depreciation in the yuan, Fitch expects financial flexibility, measured by funds flow from operations (FFO) fixed-charge cover, to benefit from refinancing of the 13.13% convertible bond (due in 2016) likely at a lower interest rate. This could mean the FFO fixed-charge cover can be sustained at around 4.5x (2015: 2.8x). Leverage, measured by FFO to net adjusted debt, is likely to improve and remain below 4x, the level at which negative rating action may be considered (2015: 4.1x). This is based on Fitch's capex expectations of around HKD300m a year over the medium term, the expected growth in FFO arising from anticipated gas sales volume increases due to rising natural gas usage in Tianjin, and our expectation of stable margins on gas volumes sold.
Support from Parent: Fitch has provided BHI a two-notch uplift for potential support from TEDA and the Tianjin government, which provided substantial support between 2004 and 2009 to BHI's predecessor, Wah Sang Gas Hld Ltd (WSG), when it was in distress. The support was provided even though the Tianjin government had only limited ownership of WSG. The rating uplift also incorporates our view that BHI would be supported in the future, should such support be required, given the strategic and operational linkages between BHI, TEDA and the Tianjin government.
Fitch's key assumptions within our rating case for the issuer include:
- Growth in natural gas consumption in Tianjin that is higher than the national average, driven by the strong economy in Tianjin and potential for increasing city gas penetration
- A stable dollar margin on gas sold, reflecting the positive impacts from a convergence of the price for existing volumes and that for incremental volumes
- Capex spend will be lower than historical levels, but remain elevated at around HKD300m per year, reflecting the company's growth profile
- The company will continue to focus on Tianjin and will not aggressively expand its investments elsewhere in China
- No changes to the competitive environment within Tianjin, including more aggressive competition between the existing operators
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Adverse regulatory developments or material increase in competition that affect BHI's market position or margins;
- Aggressive debt-funded investments;
- FFO fixed-charged cover sustained below 3.0x;
- FFO-adjusted net leverage sustained above 4.0x
- Weakening linkages with the parent
Positive: Fitch does not expect any positive rating action in the medium term given the company's scale, concentration of operations as well as the competitive dynamics within its main operating area, Tianjin. A positive rating action may be considered if the company manages to significantly increase its scale and diversity in its business profile without negatively impacting its financial profile. Positive rating action may also be considered if BHI develops stronger linkages with the parent, provided the parent has the capacity to provide timely support.