BEIJING, November 14, 2022 -- S&P Global (China) Ratings has assigned its “Aspc+” issuer credit rating to China Construction Fangcheng Investment & Development Group Co., Ltd. (“CSCEC Fangcheng” or “company”), the outlook is stable.
CSCEC Fangcheng is a wholly owned subsidiary of China State Construction Engineering Corporation Ltd. (“CSCEC” or “parent”). The company acts as an investment, construction and operation platform for CSCEC’s urban infrastructure construction business, with urban infrastructure and real estate investment and development as its main revenue sources. As of the end of 2021, the company had 21 ongoing projects with investment worth around 157.8 billion RMB (14 urban development projects and 7 PPP projects).
In our view, the issuer credit rating of ‘Aspc+’ reflects CSCEC Fangcheng’s strict, disciplined approach to investment, with projects located in developed regions with a good project return mechanism and a good track record on payments. However, increased regional fiscal pressure and sluggish land sales may pose delays to payment collections, and its PPP projects so far have no track record of sustainable payment collection. Meanwhile, the company has prudent financial policies and financial resilience, with EBITDA and project payments fully covering interest expense. As an important investment platform for its parent, the company has made significant contributions to developing CSCEC’s urban infrastructure construction business. We view it as “high” in importance to CSCEC.
The company’s business risk profile is “fair". The company has developed a good investment approval policy and process and maintains good operational discipline over its investments. This offers some guarantee that overall project quality is good. Thanks to this, the company is prudent in its selection of project locations, with projects mainly located in Urumqi, Beijing, Tianjin, Quanzhou and Nanjing. The company’s projects are in areas with strong economic and fiscal positions, and payments for most of its projects are included in the government's fiscal budget. The company has a good track record on payments. By the end of 2021, cumulative repayments from its 21 projects at hand accounted for more than 45% of the amount it invested. In the meantime, the company has a good mechanism for project payments, with its urban development projects and PPP projects facing no market risk exposure, and minimal impact from fluctuations in projects’ operating income. As the company expands into more projects in the future, we expect it to maintain its strict, disciplined approach to investment, with projects continuing to be high in quality.
Amid increasing regional fiscal pressure and sluggish land market activity, there may be some delays to payment collection. While most of CSCEC Fangcheng’s projects are included in the government's fiscal budget, payment collection for urban development projects often correlates with the local government's fiscal situation and local land sales. Dwindling demand for land is shrinking local government fund revenue. This could cause delays to local governments meeting their payment obligations. At the same time, most of the company’s PPP projects are under construction, and don’t yet have an established track record of stable payment collection.
The company’s financial risk is "significant". This reflects the company’s prudent financial policies and financial resilience. We expect capex on projects to increase, but the significant project payments due in 2022 should see debt drop off for the year, before picking up in 2023. We expect the company to receive more non-land sales related payments from PPP projects, with EBITDA and project payments fully covering interest expense. As payment collections increase, interest coverage should further improve.
A one-notch upward is applied to reflect that when compared with peers, the company’s projects are located in regions with strong economic and fiscal positions. This provides some guarantees on project payments, and considering the company’s good project payment situation, project payments already constitute a relatively high proportion of project investment.
We view the company as “high” in importance to CSCEC. As an important investment platform for its parent, the company has made significant contributions to developing CSCEC’s urban infrastructure construction business. The parent’s strict oversight of CSCEC Fangcheng’s investment, operations and finances is not expected to loosen in the foreseeable future, strengthening the linkage between the two. This allows the parent to track its subsidiary’s business and step in with timely support where required. We also believe that the company benefits from its association with CSCEC, and view the likelihood of any divestiture or sale of the company as relatively low.
The stable outlook on CSCEC Fangcheng reflects our view that over the next 24 months, the company would maintain its strict and disciplined approach to investment and approvals, with investment projects continuing to be high in quality. Its financial policy should remain prudent with the company continuing to be financially resilient. Coverage of EBITDA plus project payments to interest is expected to increase to above 2.5x. As a wholly owned subsidiary of CSCEC, CSCEC Fangcheng plays an important role in developing CSCEC’s urban infrastructure construction business and can obtain stable support from its parent.
Upside scenario: We might consider upgrading the rating of CSCEC Fangcheng if:
1) The company enters new regions with strong economic and fiscal positions, with a sustainable decline in leverage. Or
2) the company’s importance within the CSCEC group increases.
Downside scenario: We might consider lowering the rating of the company if:
1) The company's business risk profile deteriorates. This scenario could occur if i) there is a significant deterioration in the company’s collection of payments, in terms of amount, timeliness and stability; or ii) there is a significant relaxation of the company and CSCEC’s requirements for management of and investment in projects. This would result in a decline in project quality, where, for example, the company invests in weaker regions or significantly riskier business areas. Or
2) Group support is weakened. This scenario could occur if the company's importance to CSCEC is lowered, or CSCEC’s operational or financial situation deteriorates significantly for a prolonged period, resulting in diminished indicative support ability.
Related methodologies:
― S&P Global (China) Ratings-Corporate Methodology, 29 August 2022
― S&P Global (China) Ratings Supplemental Methodology—Transportation Infrastructure, 21 May 2019
― S&P Global (China) Ratings General Considerations on Rating Modifiers and Relative Ranking, 21 May 2019
Related research:
― Understanding S&P Global (China) Rating Corporate Methodology,28 July 2020
― Commentary: Understanding S&P Global (China) Ratings General Considerations On Rating Modifiers and Relative Ranking Methodology,29 June 2020
― Commentary: Understanding S&P Global (China) Ratings Approach To Support, 8 May 2019
Media Contacts:
Sharon.Tang，Beijing； (86)10-6569-2988；sharon.tang@spgchinaratings.cn
Analyst Contacts:
Kexin Wang, Beijing; kexin.wang@spgchinaratings.cn
Huang Wang, Beijing; huang.wang@spgchinaratings.cn
Jin Wang, Beijing; jin.wang@spgchinaratings.cn
Yufei Wang, Beijing; yufei.wang@spgchinaratings.cn