Qiannan Dongsheng Development Co., Ltd

Transcription

1 Credit Opinion 18 October 2017 Qiannan Dongsheng Development Co., Ltd Hong Kong Category: Corporate Rating Rating Type: Solicited Rating Industry: Local Government Financing Vehicles Long-term Credit Rating [Note] : BBB g - Short-term Credit Rating [Note] : A g -3 Rating Outlook: Stable Analysts: Elle Hu Jolie Li elle_hu@ccxap.com jolie_li@ccxap.com Director of Credit Ratings: Guo Zhang guo_zhang@ccxap.com Tel.: Key Indicators Qiannan Dongsheng Development Co., Ltd. [1] Total Assets (RMB billion) Total Assets (USD billion) [2] Net Assets (RMB billion) Net Assets (USD billion) [2] Total Revenue (RMB million) 1, Total Revenue (USD million) [2] Net Profit (RMB million) Net Profit (USD million) [2] Gross Margin (%) Return on Equity (%) Total Debt / Total Capital (%) Total Liabilities / Total Assets (%) Total Debt / EBITDA (x) EBITDA / Interest (x) [1] Consolidated financial statements in accordance with China Financial Reporting Standards audited by CAC CPA Limited. [2] Exchange rates for 2014 (1 USD = CNY), 2015 (1 USD = CNY), and 2016 (1 USD = CNY) announced by PBOC Source: Company data, CCXAP research Note: The ratings do not entail annual surveillance, and will be valid until 29 June

2 Rating Drivers High level of support from Qiannan Prefectural Government Steady revenue generation but relatively weak profitability Heighted debt leverage and moderate liquidity position Sizable capital expenditure in the early stage of development Rating Rationale The long-term credit rating of BBB g - on Qiannan Dongsheng Development Co., Ltd ( QDD or the Company ) is underpinned by (1) increasing economic and financial strength of Qiannan Prefectural Government; (2) high level of government support given the Company s strong strategic position; and (3) steady revenue generation due to the improvement of business diversification. However, the rating also is constrained by (1) high dependency of financial subsidies from higher-tier government, resulting in relatively weak self-sufficiency in fiscal strength of Qiannan Prefectural Government; and (2) the Company s sizable capital expenditure due to large scale of project construction. CCXAP has assigned the short-term credit rating of A g -3 to QDD s short-term senior notes. Rating Outlook The stable outlook on QDD s rating reflects its strong position in Duyun Economic Development Zone with high level of support from the Qiannan Prefectural Government. We expect that the Company will maintain its significant position in infrastructure construction and generate increasing revenue from different segments. What could upgrade the rating? The rating could be upgraded if (1) there are favorable regulatory framework changes to the Company; and (2) the Company improves its profitability and credit metrics. What could downgrade the rating? The rating could be downgraded if (1) there is weakening support from the Qiannan Prefectural Government; or (2) increasingly sizable capital expenditure weighs on its credit profile. Corporate Profile Founded in 2012, QDD is a local government financing vehicle (LGFV). As of 31 December 2016, the State-owned Assets Supervision and Administration Commission of Qiannan Prefecture ( Qiannan SASAC ), the Finance Bureau of Duyun Economic Development Zone and China Agricultural Major Development Fund Co. Ltd held 60.00%, 34.73% and 5.27% interests in QDD, respectively. QDD is one of the stated-owned infrastructure construction and management platforms in Duyun Economic Development Zone, primarily engaging in the business of urban infrastructure construction, government public resources franchise, industrial investment, tourism development, cultural and sports industry and urban land development. As of 31 December 2016, QDD reported consolidated total assets and total equity of RMB 13.4 billion and RMB 11.9 billion, respectively. In 2016, QDD generated total revenue and net profit of RMB 1.0 billion and RMB 0.15 billion, respectively. 2

3 Exhibit 1. Shareholding and Organization Chart as of June 2017 Source: Company information Detailed Rating Considerations 1. Improving but relatively weak economic and financial strength of Qiannan Prefecture and Duyun Economic Development Zone Qiannan Prefecture has maintained a rapid growth in economic development but presented relatively weak economic strength in recent years. Qiannan s GDP reached RMB billion in 2016, increasing by 12.5% YoY. This economic growth is mainly driven by fixed asset investment, with a total investment amount of RMB billion in The primary, secondary and tertiary industries accounted for 17.9%, 35.1% and 47.0% of GDP in 2016, respectively, as compared to 17.5%, 36.3% and 46.2% in The proportion of tertiary industries has increased mainly due to the rising contribution by tourism industry, thus the economic structure of Qiannan Prefecture has been further enhanced. Qiannan Prefecture has demonstrated relatively high degree of dependency on the financial support from higher-tier government. Qiannan s fiscal revenue recorded RMB 41.3 billion in 2016, increasing by 8.1% YoY. The financial subsidies from the higher-tier government amounted to RMB 22.6 billion and accounted for 54.7% of total fiscal revenue in 2016, showing relatively weak self-sufficiency in fiscal strength of Qiannan Prefectural Government. Qiannan s fiscal expenditures recorded RMB 41.0 billion in 2016, increasing by 7.1% YoY, showing relatively weak coverage. The fiscal balance is mainly covered by the financial subsidies from the higher-tier government. Exhibit 2. Economic and fiscal data of Qiannan Prefectural Government in GDP (RMB billion) GDP growth (%) Fiscal revenue (RMB billion) Fiscal expenditure (RMB billion) Source: Qiannan Prefectural Government statistics, CCXAP research 3

4 Established in 1992, Duyun Economic Development Zone is located in the east of Dunyun City, Qiannan Prefecture, which aims to develop into a cultural, modern manufacturing and high-tech industrial base. Duyun Economic Development Zone was established and approved by the Guizhou Provincial Government as a provincial level development zone, which is one of the 470 development zones in Mainland China. The Local Government of Duyun Economic Development Zone has presented growing financial strength in recent years. The fiscal revenue recorded RMB 3.2 billion in 2016, as compared to RMB 2.1 billion in Financial subsidies and government funds are the main sources of fiscal income of Duyun Economic Development Zone, as highly supported by the higher-tier government. Overall, high level of support from Guizhou Provincial Government provide certain guarantee for Qiannan Prefecture s and Duyun Economic Development Zone s financial strength. The steady growth in regional economy and fiscal revenue have strengthened the position of local government, which in turn helps improve the level of support provided to the Company. However, due to high dependency of financial subsidies from higher-tier government, the support strength of the Qiannan Prefectural Government is a significant factor affecting the future development of QDD. 2. High level of support from Qiannan Prefectural Government given its strategic importance and close linkage to the local government As one of the significant infrastructure construction platforms operated in Duyun Economic Development Zone and held by Qiannan Prefectural Government, QDD is primarily engaged in the businesses of urban infrastructure construction, government public resources franchise, industrial investment, tourism development, cultural and sports industry, urban land development and housing leasing, which specifically included high-speed rail station, bus station, films and television base and scenic spot. QDD received a high level of support from the Qiannan Prefectural Government given its strong strategic role. The local government also has a track record of providing continuous support to QDD, in the forms of capital injection, land injection and financial subsidies. Since its establishment, QDD received a total amount of RMB 1.2 billion of capital injection from Qiannan Prefectural Government and Finance Bureau of Duyun Economic Development Zone, received a total amount of RMB 9.8 billion of land injection from Administrative Committee of Duyun Economic Development Zone, and received around RMB 85 million of financial subsidies per annum. Exhibit 3. Financial support received from Local Government in Before 2014 Capital injection (RMB million) Asset injection (RMB million) ,389.0 Financial subsidies (RMB million) Source: Company data, CCXAP research Overall, as a prefectural infrastructure construction platform in Qiannan, the capital injection from local government has improved QDD s capital strength and eased its funding burden. We expect that Qiannan Prefectural Government and Finance Bureau of the Duyun Economic Development Zone will provide ongoing support to QDD. 4

5 3. Steady revenue growth supported by growing development of various business segments, but weak profitability QDD demonstrated steady revenue growth from its primary business in recent years. The Company achieved total revenue of RMB 1.0 billion in 2016, as compared to RMB 0.9 billion in 2015 and RMB 0.8 billion in In 2016, the Company generated over 50% of its revenue from infrastructure project construction and management, with a growing portion from tourism and transportation project management and a smaller portion from high-speed rail station operation. We believe that QDD will continue to achieve steady growth in revenue related to its growing development of various business segments. Exhibit 4. Revenue breakdown by different segments in Infrastructure construction Tourism and transportation High-speed rail station Revenue (RMB million) % of Revenue (%) Gross Profit (%) Others Total 1, Source: Company data, CCXAP research The profitability of the Company was stable but relatively weak in recent years. QDD achieved gross margin of 8.7% in 2016, as compared to 7.5% in 2015 and 7.5% in In 2016, the operating costs consisted of a major portion of administrative expenses and a minor portion of selling expenses, which recorded RMB 10.7 million and RMB 0.9 million respectively. Given low reliance on debt funding, the Company did not have any finance expenses in the past. In addition, the financial subsidies from local government contributed as a major source of profit, mainly the subsidies of infrastructure construction projects with a total amount of RMB 88.9 million in With the potential growth of diverse business operations, the Company s revenue generation and profitability metrics are expected be strengthened. 4. Sizable capital expenditure in the early stage of development QDD is one of the platforms in Duyun Economic Development Zone, which is responsible for the investment of infrastructure construction and the management of state-owned assets, focusing on the sector of tourism, entertainment, film and television. QDD s key role in infrastructure construction results in heavy capital expenditure. As of 31 December 2016, the major projects under construction included tourism projects and infrastructure construction projects, such as scenic spots, style towns, road construction and water supply etc. The aggregate investment amount was estimated at approximately RMB 6,358 million, and the construction period will be concentrated during the period of

6 Exhibit 5. Projects under construction as of 31 December 2016 Total Type Project investment (RMB million) Scenic spot Style town Others Project Commencement Date Estimated construction duration Tourism road of Rao River scenic spot years Tourism footpath from Tea Expo to Rao River scenic spot years Water supply of Rao River scenic spot years Improvement on water ecology of Rao River years Infrastructure construction of Rao River scenic spot 1, years Infrastructure construction of Qingshui River scenic spot 1, years Maojian Town construction project years Road construction of Maojian Town years Football Town construction project years European Town construction project years Han Tang Cultural Tourism Creative Park construction project years Infrastructure construction of Changgouqing years Total 6,358 Source: Company data, CCXAP Research As the main body of infrastructure construction in Duyun Economic Development Zone, the Company is still in the early stage of business development with a large scale of project pipelines, which result in a sizable capital expenditure in the near to medium term. After completion of the projects, the Company s sources of revenue include leasing income and ticket income, which will in turn help improve the operating profit, but the capital expenditure is relatively sizable at this stage. 5. Heightened debt leverage given the key role of infrastructure construction QDD demonstrated stable credit metrics but heightened debt leverage. As of 31 December 2016, the Company s total debt recorded RMB 530 million. As for the debt profile, the percentage of short-term debt relative to total debt was 15.1%. The debt-to-capital ratio registered 4.3% in 2016, while the liabilities-to-assets ratio increased to 11.5% in 2016 from 7.6% in The Company s total debt level is expected to increase continuously due to the further development of different business segments. We will continue to monitor the debt level and debt leverage of the Company. QDD also initiated the funding channels in both onshore and offshore capital markets in 2016, including bank borrowing, bond financing and industrial fund. We expect the Company will continue to widen its financing channels and to increase its debt leverage due to relatively large amount of investment projects. The Company s land reserves are relatively adequate. In July 2012 and June 2016, 40 land parcels of approximately 9.5 million sqm with an appraisal value of RMB 9.8 billion were injected to QDD by Administrative Committee of Duyun Economic Development Zone. Since 2013, QDD acquired 16 land 6

7 parcels of approximately 0.6 million sqm at a total cost of RMB 510 million. As of 31 December 2016, QDD had total land bank of 10.1 million sqm, which have not been developed yet. The book value of total land bank accounted for 73.1% of consolidated total assets. The restricted assets of the Company mainly consisted of pledged land inventories. As of 31 December 2016, the restricted assets of QDD were approximately RMB million, representing 3.0% of total assets. In addition, the accounts receivables are mainly from local government and local state-owned enterprises, thus the Company is relatively dependent on the government payment, which will have significant impact on the asset liquidity and cash flows of the Company. Furthermore, the risk of contingent liabilities is considered as manageable. As of 31 December 2016, the external guarantee amount of the Company was RMB 265 million, representing 2.2% of net assets. The two guarantee companies are the local state-owned enterprises of Duyun Economic Development Zone. 6. Moderate liquidity and solvency profile QDD demonstrated moderate liquidity profile. As of 31 December 2016, the Company held cash reserves of RMB million, which could more than cover its short-term debt of RMB 80.0 million. However, the Company s operating cash outflow increased from RMB million in 2015 to RMB million in The Company s sizable capital expenditure of project development may exert pressure on its liquidity profile. Exhibit 6. Liquidity Indicators in Exhibit 7. ST Solvency Indicators in 2016 Source: Company data, CCXAP research As for liquidity indicators, the Company s current ratio decreased while cash ratio and quick ratio increased. The current ratio recorded 12.2x and the quick ratio recorded 1.5x at end-2016, given the large proportion of land inventories relative to current assets. As for short-term solvency indicators, the Company relies on long-term borrowings to finance its construction projects, with no debt on its balance sheet before The short-term credit rating of QDD is in line with its long-term credit rating, reflecting that we expect government support would likely be provided to the Company in any financially distressed situation. QDD issued a private placement of USD 150 million senior notes with a coupon rate of 6.15% and a maturity of 364 days due on 29 June The notes are unsecured and unsubordinated obligations of QDD. 7

8 Appendix. CCXAP s Credit Rating Symbols and their Meaning China Chengxin (Asia Pacific) Credit Ratings Company Limited uses simple, consistent, and comparable rating symbols expressed in letters to represent the credit worthiness of rated entities and rated debt issues. A. Long-Term Credit Ratings A long-term credit rating refers to a rating for a period of more than 12 months. Rating Symbol Definition Capacity to meet commitments on short-term and long-term debts is extremely strong. AAAg Business is operated in a virtuous circle. The foreseeable uncertainty on business operations is minimal. AAg+ Capacity to meet short-term and long-term financial commitments is very strong. Business is AAg operated in a virtuous circle. Foreseeable uncertainty in business operations is relatively AAg- low. Ag+ Ag Ag- BBBg+ BBBg BBBg- BBg+ BBg BBg- Bg+ Bg Bg- CCCg CCg Cg Dg Capacity to meet short-term and long-term commitments is strong. Business is operated in a virtuous circle. Business operation and development may be affected by internal uncertain factors, which may create fluctuations in profitability and solvency of the issuer. Capacity to meet financial commitment is considered adequate and capacity to meet shortterm and long-term commitments is satisfactory. Business is operated in a virtuous circle. Business is affected by internal and external uncertainties. Profitability and solvency may experience significant fluctuation. Principal and interest may not be sufficiently protected by the terms of agreement. Capacity to meet short-term and long-term financial commitment is relatively weak. Financial commitment towards short-term and long-term debts is below average. Status of business operations and development is not good. Solvency is unstable and subject to sustainable risk. Financial commitment towards short-term and long-term debts is bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Solvency is uncertain and subject to high credit risk. Financial commitment towards short-term and long-term debts is very bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Poor solvency with very high credit risk. Financial commitment towards short-term and long-term debts is extremely bad. Business operations are poor. There are very limited positive internal and external factors to support business operation and development. Extremely high credit risk is found. Financial commitment towards short-term and long-term debts is insolvent. Business falls into a vicious circle. Very limited positive internal and external factors are found to support business operations and development in positive cycle. Extremely high credit risk is seen and is near default. Unable to meet financial commitments. Default is confirmed. B. Long-term Credit Rating Outlook A rating outlook is the medium- and long-term trend of the credit rating of a rated entity. In formulating a rating outlook, CCXAP considers the potential change in economic and commercial factors from a medium- and longterm perspective for a period of 12 to 18 months. Positive Indicates a rating with an ascending trend Negative Indicates a rating with a descending trend Stable Indicates the rating is likely to be stable C. Short-term Credit Ratings A short-term credit rating refers to a rating for a period of less than 12 months. Rating Symbol Definition Ag-1 Capacity to meet short-term financial commitments is extremely strong with a high level of safety. Ag-2 Capacity to meet short-term financial commitments is strong with a high level of safety. Ag-3 Capacity to meet short-term financial commitments is average but the safety may be easily affected by adverse business, financial, or economic conditions. Bg Capacity to meet short-term financial commitments is weak with a high probability of default. Cg Capacity to meet short-term financial commitments is very weak and the probability of default is very high. Dg Unable to meet financial commitments. Default is confirmed. 8

9 Copyright China Chengxin (Asia Pacific) Credit Ratings Company Limited. All rights reserved. Disclaimer Credit ratings assigned by China Chengxin (Asia Pacific) Credit Ratings Company Limited ( CCXAP ) are based on CCXAP s rating principles of independence, fairness and objectivity. A credit rating reveals and ranks specific risks, but it does not cover all risks embedded in the rated entity or the rated debt issue. Credit ratings are not recommendations for investors to buy, sell or hold debt securities, nor measurements of market value of the rated entities or the rated debt issues. While CCXAP has obtained information from sources it believes to be reliable, CCXAP does not perform an audit and undertakes no duty of due diligence or independent verification of information it receives from the rated entity. CCXAP s public ratings are available at (Rating Results) and may be distributed through media and other means. The methodology used in this rating is Rating Methodology for China s Local Government Financing Vehicles dated June 2017, available at (Rating Process -> Rating Methodology). All information published in this document belongs to CCXAP and is subject to change without prior notice by CCXAP. CCXAP considers the information contained in this document reliable. However, all information is provided on an "as is" and "as available" basis and CCXAP does not guarantee the accuracy, adequacy, completeness or timeliness of any information included in this document. None of the information may be used, including without limitation reproducing, amending, sending, distributing, transferring, lending, translating, or adapting the information, for subsequent use without CCXAP's prior written permission. CCXAP is not liable for any in whole or part caused by, resulting from or relating to any error (neglect or otherwise) or other circumstance or contingency within or outside the control of CCXAP's or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, interpretation, analysis, editing, transcription, publication, communication or delivery of any such information, or any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation lost profits), even if CCXAP, or representatives thereof, are advised of the possibility of such damage, losses or expenses. China Chengxin (Asia Pacific) Credit Ratings Company Limited Address: Suites , Jardine House, 1 Connaught Place, Hong Kong Website: info@ccxap.com Tel: Fax: