Guangxi Liuzhou Dongcheng Investment and Development Group Co., Ltd.

Transcription

1 Credit Opinion 5 December 2018 Guangxi Liuzhou Dongcheng Investment and Development Group Co., Ltd. Hong Kong Category: Corporate Rating Rating Type: Solicited Rating Industry: Local Government Financing Vehicles Long-term Credit Rating: BBB g + Rating Outlook: Stable Analysts: Vincent Tong Jacky Lau vincent_tong@ccxap.com jacky_lau@ccxap.com Director of Credit Ratings: Guo Zhang guo_zhang@ccxap.com Tel.: Key Indicators Guangxi Liuzhou Dongcheng Investment and 2018H Development Group Co., Ltd. [1] Total Assets (RMB billion) Total Assets (USD billion) [2] Net Assets (RMB billion) Net Assets (USD billion) [2] Total Revenue (RMB billion) Total Revenue (USD billion) [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 PRC GAAP audited by Grant Thornton. [2] Exchange rates for 2015 (1 USD = CNY), 2016 (1 USD = CNY), 2017 (1 USD = CNY), and 2018H1 (1 USD = CNY) announced by PBOC. Source: Company data, CCXAP research 1

2 Rating Drivers Solid shareholder supports given the Company s strategic importance in Liudong New District Steady revenue growth in primary land development business with sufficient land bank Sizable capital expenditure as driven by the Company s key role in infrastructure construction Weak standalone financial profile as characterized by heightened debt leverage and modest credit metrics Rating Rationale The BBB g + rating of Guangxi Liuzhou Dongcheng Investment Development Group Co., Ltd. ( GLD or the Company ) is underpinned by (1) solid parental support as its strong strategic position in the development of Liudong New District; (2) sufficient land bank; and (3) growing business diversification gives additional income sources to the Company. However, the rating also is constrained by the Company s (1) sizable capital expenditure due to large scale of project pipelines; (2) heightened debt level and modest credit metrics; and (3) modest liquidity. Rating Outlook The stable outlook on GLD s rating reflects its strong strategic role as the sole investment and construction enterprise in Liudong New District, with solid supports from its parent. We expect that the Company will maintain its monopoly position in the urban development business and adhere to its disciplined financial management. What could upgrade the rating? The rating could be upgraded if (1) more favorable policies impose to the Company which further strengthens its strategic important role in the development of Liudong New District; (2) the Company s business diversification notably improves; (3) the Company improves its credit metrics such as debt leverage and liquidity. What could downgrade the rating? The rating could be downgraded if (1) there is indication of weakening supports from its parent; (2) increasingly sizable capital expenditure exerts pressure on its credit profile; or (3) heightened debt leverage and severely impaired liquidity position. Corporate Profile Founded in 2004, GLD is directly and wholly owned by Liuzhou State-Owned Assets Supervision and Administration Commission ( Liuzhou SASAC ). In March 2017, Liuzhou SASAC announced the reorganization of GLD and raised its registered capital from RMB 0.8 billion to RMB 2.0 billion. The Company is the sole infrastructure investment and construction entity in Liudong New District, mainly engaging in primary land development, infrastructure investment and construction, property leasing, and state-owned asset operation and management. As of 31 December 2017, GLD reported consolidated total assets and total equity of RMB billion and RMB 39.7 billion, respectively. In 2017, GLD generated total revenue of RMB 3.6 billion and net profit of RMB 0.5 billion. 2

3 Exhibit 1. Shareholding and Organization Chart as of 30 June 2018 Liuzhou SASAC GLD Source: Company information Detailed Rating Considerations 1. Solid parental supports given GLD s strategic importance in the development of Liudong New District Liuzhou is the second largest city by gross regional product (GRP) in Guangxi Province, ranking after the provincial capital of Nanning. Liuzhou has achieved a steady economic growth and reported a GRP of RMB billion in 2017, increasing by 7.1% YoY. The GRP per capita was RMB 69,249, up 7.8% YoY. Liuzhou s economic growth is mainly driven by three pillar sectors namely automobile, machinery and metallurgy. The sectors of automobile, machinery and metallurgy recorded a YoY growth of 5.8%, 21.4% and 9.1% in 2017 in terms of production value. The primary, secondary and tertiary industries accounted for 6.9%, 54.0% and 39.1% of GRP in 2017, with a YoY growth of 3.7%, 4.4% and 11.6% respectively. Established in 2007, Liudong New District is located in the northeast of Liuzhou, which aims to develop into a high-tech industrial base in the southwestern region of China. It is the largest industrial district in Guangxi and the first new industrial town with industrial output exceeding RMB 100 billion in Guangxi. Since its establishment, Liudong New District has achieved robust economic growth, at a growth rate of 20% to 30% per annum in the last ten years, as contributed by the escalating urbanization progress and increasing social investments. The GRP reached RMB billion in 2016 as compared to RMB 10.2 billion in GLD is directly and wholly owned by Liuzhou SASAC, principally engaged in primary land development and public service facilities construction. It is the sole state-owned entity in Liudong New District for the urban development. Given its strong strategically important role, GLD receives solid parental supports from Liuzhou Municipal Government in forms of capital injections, land injections, project grants, and financial subsidies. Liuzhou SASAC directly controls and supervises the Company by appointing the key management personnel to monitor its business and financial decisions. 3

4 From its establishment to the year end of 2017, GLD received a total amount of RMB 45.7 billion of financial supports from the Liuzhou Municipal Government, including registered capital of RMB 818 million, additional capital injection of RMB 2,133 million, state-owned operation proceeds of RMB 17 million, financial subsidies of RMB 546 million, special entrusted construction funds of RMB 4,188 million, assets allocation of RMB 25,237 million, government debt swap of RMB 9,905 million, and projects repurchase of RMB 2,816 million. In 2018H1, the Company has obtained government debt swap of RMB 937 million and financial subsidies of RMB 1 million. The solid supports from its sole shareholder helped enhance the Company s financial and business strength. Looking forward, together with the fast-growing infrastructure development of Liudong New District, its strategic position will be further consolidated and strengthened. We expect that its shareholder will continue to provide GLD with strong business supports in terms of favorable policies and project grants. We also believe its shareholder will give vigorous financial support to GLD in times of need. 2. Steady revenue growth in primary land development business with sufficient land bank GLD demonstrated steady revenue growth in recent years, as driven by growing land sale revenue. The Company achieved total revenue of RMB 3.6 billion in 2017, as compared to RMB 1.8 billion in 2016 and RMB 1.7 billion in 2015, representing a CAGR of 44.0%. The Company also showed a relatively high gross margin, reporting gross margin of 52.5% in 2017, as compared to 34.8% in 2016 and 38.7% in Exhibit 2. Revenue breakdown by segments in 2017 Source: Company data, CCXAP research The primary land development business is the key growth driver of the Company s revenue, which accounted for 83.8% of its revenue in This business segment is regulated and supervised by Liuzhou Municipal Government in accordance with the development plan of Liudong New District. GLD is responsible for project initiation, investment of land parcels for primary development and obtaining approval from relevant departments of Liuzhou Municipal Government. The net proceeds from land sales (after deduction of applicable provisions to the Central Government and administrative fee) were fully paid to GLD through Liudong New District s Management Committee under Liuzhou Finance Bureau s annual fiscal budget. However, this business model has changed since Its 4

5 land consolidation revenue is recognized on a cost-plus-permitted-return basis. The new recognition method may cause a negative impact on its business margin in the primary land development business, owing to the land sale payments from the government were no longer market-driven but is based on incurred cost plus an allowed return at 15%. In line with the planning of Liudong New District by Liuzhou Municipal Government, GLD has completed sizable land consolidation over the past years. In 2017, the Company completed land consolidation of 14,609 mu, as compared to 17,859 mu in 2016 and 9,491 mu in In 2017, the Company completed land sales of 1,701 mu, down from 4,371.3 mu in 2016 and 4,443.2 mu in The sharp decrease in land sales area was due to the sale structure shift from industrial land to commercial land. Among land sales area, industrial land and commercial land accounted for 38.1% and 57.8% respectively in 2017, as compared to around 80:20 in previous years. The sharp increase in the sales of commercial land was viewed as a positive signal for the regional development environment and helped unearth the land value of the Company. The Company recorded total land sales revenue of RMB 3,000.3 million in 2017, as compared with RMB 1,501.3 million in 2016 and RMB 1,236.9 million in 2015, representing a CAGR of 55.7%. Exhibit 3. Land bank at the end of Industrial land bank (mu) 5, , ,353.2 Commercial land bank (mu) 16, , ,784.4 Total land bank (mu) 22, , ,137.6 Source: Company data, CCXAP research GLD s land bank remained sufficient for future development. As of 31 December 2017, GLD had a total land bank of 22,014.1 mu, of which around 75% was for commercial use. According to the preliminary planning, the Company is expected to remise land of approximately 2,000 mu per annum from 2018 to 2020, together with the Company s adequate land reserves and orderly managed sales plan, we believe it help stabilize its land sale revenue in the future. However, given the recent change in its primary land development model in 2018, we will keep monitoring the ongoing impact on the Company s profitability and business stability. 3. Increasing diversification of business segments provides additional income sources to the Company Apart from GLD s core business of primary land development, the Company has gradually engaged in other business segments along with the improving economic condition in Liudong New District. The Company s diverse business operations consisted of public service facilities (infrastructure construction), urban property leasing, and other urban service business (amusement project and franchising operations such as gas supply and gas stations). 5

6 Exhibit 4. Revenue by segments in (RMB million) Segments 2018H Primary land development 1, , , ,236.9 Public service facilities Property leasing Other Total 2, , , ,726.4 Source: Company data, CCXAP research As for the property leasing business, the Company s leasable assets mainly included 47 standard factories, 75 vocational education park buildings, 6 exhibition buildings and 38 residential buildings at the end-2017, with leased area of 1.2 million sqm and the occupancy rate approximately 73% in The revenue from rental property steadily increased to RMB million in 2017, representing a YoY growth of 12.8%. The property leasing segment provided recurring rental income and stable cash flow to the Company. As for the amusement project, the Company started the operation of its self-constructed theme park, namely the Visionland, in July The theme park covered more than 783 mu of land and featured a diverse of game facilities. In 2017, the theme park has reported approximately 156 thousand visitors and generated recognized revenue of RMB 19.0 million. With a number of upcoming events and promotion activities in 2018, the Company expected to serve over 700 thousand visitors and anticipated to generate revenue of around 100 million for the year. We believe that the park could help provide stable cash flow to the Company when its operation becomes matured. As for the franchising operations business, the Company offers gas utilities services and operated a number of gas stations in Liuzhou Dongcheng area through its subsidiaries, namely Liuzhou Dongcheng Gas Utilities Development Company Limited for gas utilities and Liuzhou Dongcheng Petroleum and Chemical Company Limited and Liuzhou Dongcheng Rongxiang Petroleum Company Limited for gas stations. In 2017, the revenue of gas supply and gas stations recorded RMB 73.7 million and RMB 80.6 million, respectively. The business scale is relatively small and the profitability is relatively low in the early stage of business development with limited service scope. GLD will remain its strategic importance as the key state-owned enterprise for urban development and public services in Liudong New District, with the primary land development as its core business. Meanwhile, the Company will generate additional income associated with the growing economic conditions of the region, which help improve the income structure with diverse business segments. 4. Sizable capital expenditure due to GLD s key responsibility of infrastructure construction GLD is the key financing and investment entity to undertake the Liudong New District s infrastructure and economic development projects. These projects are mostly non-profit such as building fire stations, bridges, campuses and hospitals. They are mainly developed under agency construction model and BT & Repurchase model. Under the agency construction model, the Company will perform project construction as the general contractor and charge management fee to the Government, which are typically 1.0% to 1.5% of the investment amount. Projects are financed by Liuzhou Finance Bureau through special funds under the annual financial budget of the local government based on the construction progress. Under BT & repurchase model, the Liuzhou government will repurchase the 6

7 target assets at agreed price in accordance to the BT agreement and then pay Company by instalments after completion of projects or in the agreed time period. Since GLD plays a key development role in the infrastructure construction of the district, it causes a heavy annual capital expenditure to the Company. As of 30 June 2018, the Company was undertaking a number of major construction projects with aggregated investment amount of RMB 36.8 billion and invested amount of RMB 13.9 billion. Projects under construction included building factories, settlement housing, vocational education school and exhibition center. In addition, the Company proposed to commence five projects in 2018, with aggregated investment amount at approximately RMB 4,030 million and invested amount of RMB 1,209 million. The average construction period of the projects is three years. In 2018, the Company will continue its rapid expansion on the back of mounting regional construction in Liudong New District. It focuses on six major sectors including transportation, public services, settlement housing, commercial infrastructure, industrial facilities and environmental protection. The Company has planned to achieve constructing route of 35 km, 1,902 units of settlement houses with a total area of 208 thousand sqm and 2,686 units of commercial housing with a total area of 294 thousand sqm. Exhibit 5. Projects under planning as of 30 June 2018 Projects Total investment (RMB million) Invested amount (RMB million) Liudong Center (Eastern Tower) 1, Liuzhou Military Museum Liuzhou International Convention and Exhibition Centre (Phase II) Liuzhou International Convention and Exhibition Centre (Phase III) 1, Standard Factory (Zone D) Total 4,030 1,209 Source: Company data, CCXAP Research Given its unique development importance in Liudong New District, the Company is expected to carry large capital expenditure in the near to medium term in association with its project pipelines and fastgrowing development of the district. 5. Weak standalone financial profile as characterized by heightened debt leverage and modest credit metrics GLD demonstrated heightened debt leverage and weak interest coverage. As of 31 December 2017, the Company maintained a large amount of debt on balance sheet at RMB 55.4 billion, grew by 74.1% as compared to that at end The debt-to-capital ratio climbed to 58.9% in 2017, from 54.0% in 2016 and 49.9% in The debt-to-capital ratio was 59.7% at mid The total debt to EBITDA ratio was 60.9x and the EBITDA interest coverage ratio was 0.3x in

8 As for the debt profile, the percentage of short-term debt relative to its total debt was 18.6% at end- 2017, indicating a slight improvement as compared to 23.3% in The Company has utilized its diversified funding channels and achieved an optimized debt structure. With the business expansion and government debt swap, the Company s capital strength has improved. In 2017, the Company obtained a capital injection under the government debt swap program with a total amount of RMB 3.7 billion, which helped improve its capital structure. However, since the interest-bearing debt continued to increase, the Company s debt service capability is still relatively weak. The Company s total debt level is expected to remain high due to the rapid development of different business segments. We will continue to monitor the debt size and leverage of the Company. Nevertheless, GLD has strong financial flexibility through various funding channels in the onshore capital markets, including bank loan, bond issuance, trust and partnership investment fund. The Company has maintained a good relationship with reputable domestic banks such as the China Development Bank, China Construction Bank and Bank of Communication. As of 31 December 2017, GLD had credit facilities of RMB 56.4 billion from domestic banks, RMB 13.9 billion of which remained uncommitted. GLD also expanded its debt financing by issuing various types of bond, including corporate bonds, medium-term notes and perpetual bonds. In 2017, the Company has issued RMB 600 million private placement notes and RMB 1.0 billion perpetual medium-term notes. The interest rate of the RMB 1.0 billion perpetual medium-term notes was 7.2% per annum. In 2018, the Company intended to diversify its fund sources in propulsion of loans from Pudong Development Bank and ICBC Bank amounted of RMB 7.2 billion and RMB 3.3 billion respectively. 6. Moderate liquidity profile with negative operating cash flow GLD had moderate liquidity profile that remained resilient to unfavorable market conditions. As of 31 December 2017, the Company held unrestricted cash reserve of RMB 10.8 billion, which could fully cover its short-term debt of RMB 10.3 billion. However, the Company s net operating cash flow was fluctuating in connection with the land sale payment from the government. The Company has recorded an operating cash outflow of RMB 6,163.3 million in 2017, owing to a delay of land sale payments from the government. Moreover, the Company s sizable capital expenditure of project development will continue to give pressure on its liquidity profile while it was partially mitigated by its utilization of credit facilities from domestic banks and its good refinancing record in the past. Nonetheless, the Company s restricted assets were relatively large in scale. It included restricted cash, land inventories and projects under construction. As of 31 December 2017, the restricted assets of GLD were RMB 20.1 billion, representing 20.0% of total assets. The sizable restricted assets might cause negative impact on the Company s liquidity profile and financial flexibility in times of stress. Moreover, the Company s contingent liabilities were high relative to its net asset scale. As of 30 June 2018, the Company provided external guarantee of RMB 8.4 billion, representing 21.6% of net assets. Nevertheless, we believe that the credit risks of the guaranteed companies are relatively low due to most of them are the state-owned enterprises of Liuzhou Municipal Government with strong parental supports and good operating track record. CCXAP will keep monitoring the impact of the contingent liabilities on the Company s credit health. 8

9 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. 9

10 Copyright 2018.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: