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Fitch Publishes Urumqi Gaoxin Investment and Development at 'BB+'; Outlook Stable
December 5, 2017 / 9:55 AM / 9 days ago

Fitch Publishes Urumqi Gaoxin Investment and Development at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 05 (Fitch) Fitch Ratings has published Urumqi Gaoxin Investment and Development Group Co., Ltd.'s (UGID) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlook is Stable. UGID's ratings are credit-linked to, but not equalised, with Fitch's internal assessment of the district government of the Urumqi High-tech Industrial Development Zone (New City) in China. The link is reflected in the government's full ownership of UGID and oversight of its financials, and the strong policy role the company plays in New City's development. These factors mean there is a high likelihood UGID would get extraordinary support from regional authorities, if needed. At the same time, Fitch has assigned UGID's proposed senior unsecured US dollar notes an expected rating of 'BB+(EXP)'. The proposed offshore notes will be issued by UGID directly and will constitute unsubordinated and unsecured obligations, ranking pari passu with all other present and future obligations of UGID. The final ratings on the proposed US dollar notes are contingent upon the receipt of final documents conforming to information already received. KEY RATING DRIVERS New City's Strong Creditworthiness: New City is a district level local regional government in Urumqi, the capital of Xinjiang Uyghur Autonomous Region in northwest China. The administration of New City also covers the high-tech zone. The district contributed on average one-third of the gross regional product of Urumqi municipality and about 10% of the provincial government's economy. New City is one of the most important economic engines in Urumqi and takes the lead in reshaping the economic structure of the less-developed western region of China. Legal Status Mid-Range: UGID is 100% directly owned and supervised by the Urumqi High-tech Industrial Development Zone State-owned Assets Supervision and Administration Commission (New City SASAC). Its mid-range legal status reflects the company's registration under Chinese company law, which does not allow for the automatic transfer of liabilities to its parent in case of dissolution. Strong Strategic Importance: UGID is the New City government's most important financing platform for providing public services to the district and the enterprises that operate in the high-tech zone. Around 80% of its operating revenue in 2016 was sourced from the New City government, according to UGID. UGID develops the zone's infrastructure and provides financial services to the enterprises in the zone, namely micro-loan and guarantee services. Its long-term strategy is highly compatible with the strategy of the high-tech zone and the New City government. UGID is essential to the success of the local economy. Government Support Mid-Range: UGID has received capital injections and stable operating subsidies from the New City government. Subsidies were more than 30% of operating revenue in 2012 and 2013 but subsequently dropped to around 10% in 2016 due to its flourishing operating revenue driven by government infrastructure projects. Capital injection amounted to around 33% of UGID's total assets as at end-2016, including a debt swap. Part of UGID's debt was taken over by the government as direct debt. However, Fitch expects its capital market borrowing to rise amid tighter regulations over local government debt. Strong Government Control: UGID is wholly owned and directly controlled by the government. Company directors and senior management are mainly appointed or nominated by the municipal government and its major decisions need the government's approval. Its financing plans and debt require government approval as well. Vulnerable to Regulations, Regional Finances: UGID is tasked with implementing the government's plan to develop the high-tech zone and its business is heavily affected by the New City government's annual spending budget, particularly on urban infrastructure and fixed-asset investments. The country's regulations on the administration of local regional governments' financing vehicles may also have a material impact on UGID's business development and financing sources. Rapid Growth in Total Debt: UGID has a weaker standalone financial profile, with debt/EBITDA (Fitch's calculation) of 5x-9x for the past two years and net debt/EBITDA (Fitch's calculation) of around 4.87x-4.97x during 2015-2016. Interest coverage has stayed above 3x during the past three years. Total debt (Fitch's calculation) increased by 50% in 1H17 to 4.45x of the total debt at end-2014, with long-term debt growing by 85% in the first six months of 2017. The debt growth coincided with the fixed-asset investment growth in New City - 46.7% in 1H17, signaling the high correlation of UGID's growth with its parent's investment plan due to the company's strategic importance. New City is aiming to achieve 77% annual growth in fixed-asset investment in 2017 and Fitch expects UGID's total debt growth to continue if the local government proceeds with its aggressive plan to expand fixed-asset investments. RATING SENSITIVITIES Any rating action on UGID's IDRs would result in similar action on the ratings of the proposed US dollar notes. A stronger or more explicit support commitment from the New City government may trigger a positive rating action on UGID. An upgrade of Fitch's internal credit view on the New City government may lead to positive rating action on UGID. Significant weakening of UGID's strategic importance to New City, dilution of its shareholding, a decreasing share of revenue from the government, and/or significantly reduced government support, may result in a downgrade; likewise, a downgrade could also stem from weaker fiscal performance or increased indebtedness at the parent, leading to a deterioration in Fitch's internal assessment of New City's creditworthiness. Contact: Primary Analyst Lorraine Liu Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 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 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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