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Fitch Affirms Sichuan Development's 'A-' Rating; Outlook Stable
September 12, 2017 / 10:36 AM / 10 days ago

Fitch Affirms Sichuan Development's 'A-' Rating; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 12 (Fitch) Fitch Ratings has affirmed Sichuan Development Holdings Co., Ltd.'s (SDH) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-'. The Outlook is Stable. The ratings are only for SDH, whose group subsidiaries may have lower ratings. KEY RATING DRIVERS Links to Sichuan Province: SDH's ratings are credit-linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of Sichuan province. This takes into account factors such as the provincial government's 100% ownership of SDH, strong government oversight of its financials and the strategic importance of SDH's operation to the province. As a consequence, SDH is classified as a credit-linked public-sector entity under Fitch's criteria and there is high likelihood the government would extend extraordinary support to SDH, if needed. Sichuan's Satisfactory Creditworthiness: Sichuan province has a well-diversified socio-economic profile and is strategically important as a key province in western China. The central government's regular and large transfers also strengthen the visibility of Sichuan's fiscal performance and Fitch considers the province's budget performance as satisfactory. Sichuan's credit strengths are counterbalanced by high contingent liabilities arising from its state-owned entities. Strategic Importance Attribute Stronger: SDH is the only provincial-level state-owned capital operation enterprise in Sichuan that is focused on infrastructure development and financing, resource security, capital operation and management, inviting provincial investment, developing industrial clusters and promoting industry advancement. SDH had CNY756 billion in assets, which makes it Sichuan's largest public-sector entity at end-2016. Control Attribute Stronger: The local government holds 100% of SDH's shares; hence the government appoints most of the board members. In addition, major projects as well as investment and financing decisions require the government's approval. SDH's financing plan and debt levels are closely monitored by the province and the company is required to regularly report its operational and financial results. Legal Status Attribute Mid-Range: SDH is registered as a state-owned limited-liability company under China's company law. It is wholly owned by the Sichuan provincial government and is regulated under the provincial government to ensure its social functions are in line with the government's development plan. Integration Attribute Mid-Range: The provincial government continues to provide significant monetary support to support SDH's business as it is a core functional body of the province. This includes, but is not limited to, paid-in capital increases, such as the CNY4.6 billion increase by the local bureau of finance in 2016; subsidies, which made up 88% of 2015 net profit and 41% of 2016 net profit; and subsidised loans. The fiscal support aims to partly fund SDH's capital expenditure and debt servicing. SDH also receives non-monetary government support that allows it to maintain robust long-term relationships with major banks, including policy banks and the five largest state-owned banks. Weak Financial Profile: Ongoing infrastructure investments in Sichuan have led to high leverage. Debt expanded 20% in 2016, which brought net debt to adjusted EBITDA to 18.4x. As a result, the company had negative free cash flow in the previous five years. Fitch expects this trend to continue in the medium term as the capex is essential to sustain economic growth in the province. However, perceived strong support from Sichuan province could mitigate this risk. RATING SENSITIVITIES Links with Province: An upgrade of Fitch's internal assessment of the creditworthiness of Sichuan province may trigger positive rating action on SDH. A significant weakening in SDH's strategic importance to the province, dilution of the provincial government's shareholding or reduced provincial government support may result in a downgrade. A downgrade may also stem from weaker fiscal performance or increased indebtedness of the province, leading to deterioration in its creditworthiness. Contact: Primary Analyst Terry Gao Senior Director +852 2263 9972 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Ark Huang Analyst +86 21 2028 3153 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating Criteria for Public Sector Revenue-Supported Debt (pub. 05 Jun 2017) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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