May 10, 2017 / 6:29 AM / 3 months ago

Fitch Affirms Shanghai Construction at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, May 10 (Fitch) Fitch Ratings-Hong Kong/Shanghai-10 May 2017: Fitch Ratings has affirmed Shanghai Construction Group Co., Ltd.'s (SCGC) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. Fitch has also affirmed the senior unsecured notes issued by SCGC's subsidiary, YONGDA Investment Limited, at 'BBB'. Fitch rates SCGC using a bottom-up approach, in line with the agency's Parent and Subsidiary Rating Linkage criteria. Fitch has notched the IDR one level above SCGC's standalone rating assessment of 'BBB-' to reflect its moderate operational and strategic ties with the Shanghai municipal government through its 55.7% parent, the Shanghai branch of the State-Owned Assets Supervision and Administration Commission (Shanghai SASAC). The Stable Outlook reflects Fitch's expectation that SCGC's operations will remain stable and that Shanghai SASAC will continue to support SCGC. KEY RATING DRIVERS Shanghai Government Linkages Unchanged: SCGC has built more than half of Shanghai's key projects. Its technical strength has supported its strategic importance to the government. SCGC's construction order book rose 22% yoy to CNY165.2 billion in 2016, 56% of which comes from the Shanghai region. Super-High-Rise Building Expertise: SCGC is one of two companies that dominate the construction of super-high-rise buildings in China. The other player, China State Construction Engineering Corporation Ltd (A/Stable), is the world's largest engineering and construction company by revenue and backlog. SCGC has been ranked as one of the world's 50-largest international engineering contractors by Engineering News-Record since 1998 and placed 10th in 2016. Broad Business Diversification: SCGC is a diversified contractor that operates across the construction value chain; this includes design and construction; production of concrete and construction components; real estate development; as well as investment, construction and operation of urban infrastructure projects. Product diversification helps mitigate cyclical cash flow from the construction business. Net Cash Position: We expect SCGC to remain in a net cash position in the medium term, supported by low capex, less land purchases and stable operation. The company had net cash of CNY6.8 billion in 2016 and cut its capex by 57% yoy to CNY1.3 billion despite a large increase in land purchases. We expect capex to be less than CNY2 billion annually in the next few years and land purchases to decline from CNY13 billion in 2016 to around CNY6 billion a year. The company's cash position is also supported by the completion of CNY1.3 billion in equity proceeds for SCGC's staff equity holdings in February 2017. DERIVATION SUMMARY SCGC's standalone rating of 'BBB-'/Stable reflects its leading position in Shanghai's engineering and construction market, limited contract risk, large size, net cash position and strong liquidity. However, its rating is constrained by a lack of geographical diversification, with most of its revenue being generated from Shanghai. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Operating EBITDA margin at around 5.0% (2016: 4.5%) - Revenue growth of 5.0%-6.0% for 2017, 2018 and 2019 annually (2016: 7.5%) - cut in land purchases RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - EBITDAR margin below 3.0% for a sustained period (2016: 4.5%) - FFO-adjusted net leverage above 0.5x for a sustained period (2016: net cash), though we expect stronger government support should leverage rise - Weakening of linkages between SCGC and Shanghai SASAC Positive: Developments that may, individually or collectively, lead to positive rating action include: - EBITDAR margin sustained above 4.0% - Sustained positive FCF after new investment projects and property project acquisitions - Strengthening of linkage between SCGC and Shanghai SASAC LIQUIDITY Strong Liquidity Position: The company has total debt of CNY42.0 billion as of end-2016, including CNY8.5 billion due within one year. Its available cash amounted to CNY48.8 billion and unused banking facilities were CNY146.5 billion. Contact: Primary Analyst Roy Zhang Director +852 2263 9979 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Stella Wang Associate Director +86 21 5097 3026 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments: No equity assigned for SCGC's perpetual bonds. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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