Fitch Rates China State Construction Engineering's USD Bonds 'A(EXP)'
OREANDA-NEWS. Fitch Ratings has assigned China State Construction Engineering Corporation Ltd's (CSCECL; A/Stable) proposed US dollar-denominated bonds an expected 'A(EXP)' rating.
The bonds are to be issued by CSCEC Finance (Cayman) I Limited, and unconditionally and irrevocably guaranteed by CSCECL. CSCEC Finance (Cayman) I Limited is a 100%-owned subsidiary of CSCECL. The notes are rated at the same level as CSCECL's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.
The final rating on the proposed notes is contingent upon the receipt of documents conforming to information already received.
KEY RATING DRIVERS
Bottom-Up Approach: Fitch has notched CSCECL's IDR three levels above its standalone assessment of 'BBB', to reflect CSCECL's strong operational and strategic ties with the central government through its 56.26% parent China State Construction Engineering Corporation (CSCEC), which is wholly owned by the State-owned Assets Supervision and Administration Commission. In assigning the standalone rating, Fitch analysed CSCECL's financials after deconsolidating its property development subsidiary, China Overseas Land & Investment Ltd (COLI; BBB+/Stable).
Strategic Importance: CSCECL has a monopoly in aerospace and diplomatic construction and is also the largest social housing builder in China. With its expertise in technically complex projects, CSCECL has built 90% of the super high-rise buildings in China that are above 300m tall. CSCECL is one of two companies qualified to construct nuclear islands and one of five companies licensed to build railways in China.
Scale Provides Influence: CSCECL is the largest construction company in China and in the world by revenue. It is also one of the largest SOEs held by the central government in China. The company reported a deconsolidated EBITDA of CNY34bn in 2014. The company has played a part in establishing construction industry rules due to its market leadership, and has led the Chinese construction industry in taking on overseas projects.
Diversification Benefits: China accounts for 92% of the company's deconsolidated revenues, but this is well-diversified across all regions in the country. In addition, CSCECL covers more types of property and infrastructure projects compared with other large state-owned construction companies. It has low client concentration, with its top five customers accounting for only 2% of its deconsolidated revenue in 2014.
Sustainable Contract Growth; Limited Contract Risk: CSCECL's new contracts rose at CAGR of 18% in the past four years. The company's ratio of order book to revenue was 2.6x in 2012, 3.0x in 2013, and 3.0x in 2014. CSCECL is able to transfer most of its cost inflation risk to clients using cost-plus pricing for the most of its services provided. This compensates for CSCECL's lower deconsolidated EBITDA margin of around 5% in 2014 compared with global engineering and construction companies.
High Leverage But Strong Liquidity: CSCECL has deconsolidated FFO-adjusted leverage of 1.65x and deconsolidated FFO fixed charge coverage of 2.44x in 2014. However, the company has a strong liquidity with CNY112bn in unrestricted cash, compared with CNY50bn in short-term debt on a deconsolidated basis at end-2014. The company also derives financial flexibility from its 61% stake in COLI, which was valued at CNY125bn at 29 October 2015.
Fitch's key assumptions within our rating case for the issuer include:
- Revenue grows at 12% annually in the next three years (after deconsolidating COLI).
- Capex maintained at CNY11bn annually in the next three years (after deconsolidating COLI).
- Operating EBITDA margin maintained at 5% in the next three years (after deconsolidating COLI).
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- EBITDA margin sustained above 7% (after deconsolidating COLI).
- Sustained net cash position (after deconsolidating COLI).
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustained above 3x (after deconsolidating COLI).
- EBITDA margin sustained below 4% (after deconsolidating COLI).
- Weakening linkages between CSCEC and the Chinese sovereign.