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Fitch Affirms China Communication Construction Company at 'A-'/Stable
January 11, 2017 / 6:21 AM / a year ago

Fitch Affirms China Communication Construction Company at 'A-'/Stable

(The following statement was released by the rating agency) HONG KONG, January 11 (Fitch) Fitch Ratings has affirmed China Communications Construction Company Limited's (CCCC) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating of 'A-'. The Outlook on the IDR is Stable. Fitch has notched the IDR two levels below China's Long-Term IDR of 'A+' with a Stable Outlook - in line with the agency's top-down approach in its Parent and Subsidiary Linkage rating criteria - to reflect CCCC's strong operational and strategic ties with the Chinese government through its 63.83% parent, China Communications Construction Group (CCCG). The latter is 100%-owned by the State-owned Assets Supervision and Administration Commission (SASAC). CCCC accounts for almost all of CCCG's assets and revenue. The Stable Outlook reflects Fitch's expectation of continued state support for CCCC. KEY RATING DRIVERS Strategic Position Unchanged: CCCC has maintained its monopoly position in China's maritime engineering and construction (E&C) field in 2016. In addition, CCCC is strategically important to the Chinese government's push to strengthen China's competitiveness in global E&C markets. CCCC is one of the largest participants in China's One-Belt One-Road (OBOR) foreign-policy initiative, with 21% of new contracts coming from overseas in 1H16. The company is also a strategic vehicle used by the government in its transportation development plans. It is China's largest planner and designer of roads and bridges, and a major participant in planning and setting E&C standards for China's national highway system. Steady Profitability: CCCC's revenue growth has slowed to 4% in the first nine months of 2016 (9M16, versus 10% in 2015), caused by the impact from VAT reform. However, the gross margin was maintained at 13%, thanks to the higher contribution from overseas and investment projects. Fitch expects the company to maintain the EBITDA margin at around 8% in 2016 and 2017. Revenue Coverage Remains Strong: New contract growth has accelerated (by 10% 9M16; 7% 2015). The increase in investment and overseas projects has offset the fall caused by decreased fixed-asset investment (FAI) in highway and port construction. New contracts in investment projects and overseas projects grew at 86% and 31% yoy, respectively, with new port contracts declining by 27% and road and bridge down by 4%. We estimate that the backlog/revenue ratio had remained at around 2.5x by end-3Q16. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth to remain at around 9%-13% between 2016 and 2018 - EBITDA margin to remain at around 8.0% between 2016 and 2018. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - Positive rating action on the Chinese sovereign - Strengthening linkage between CCCG and the Chinese sovereign. Negative: Developments that may, individually or collectively, lead to negative rating action include: - Negative rating action on the Chinese sovereign - Weakening linkage between CCCC and CCCG - Weakening linkage between CCCG and the Chinese sovereign. For China's sovereign rating, Fitch outlined the following sensitivities in its rating action commentary on 21 November 2016: The main factors that individually or collectively could lead to rating action are: Positive - Greater confidence that the debt problem in the broader economy can be resolved without a major negative impact on growth or financial stability. - More evidence that the economy can rebalance smoothly without experiencing a disruptive "hard landing". - Widespread adoption of the Chinese yuan as a reserve global currency. Negative - A continuation of policy settings that result in a further build-up of the economy's imbalances and vulnerabilities. - An adverse macroeconomic or financial shock that weakens medium-term growth prospects or affects public finances. - Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Zhai Director +86 2263 9974 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017391 Solicitation Status here 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. 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