Fitch Ratings has affirmed China State Construction International Holdings Limited's (CSCI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'.

The Outlook on the IDR is Stable.

Fitch has also affirmed the 'BBB+' ratings on the outstanding US dollar 3.375% senior unsecured notes due 29 November 2022 and US dollar 3.875% senior unsecured notes due 29 November 2027, both issued by China State Construction Finance (Cayman) II Limited and guaranteed by CSCI.

The affirmation reflects CSCI's strong linkages with its direct parent, China Overseas Holdings Limited (COHL), and ultimate parent China State Construction Engineering Corporation Ltd (CSCEC, A/Stable), under Fitch's Parent and Subsidiary Linkage Rating Criteria. The Stable Outlook reflects Fitch's expectation that CSCI will maintain the strong linkages with the parents.

Key Rating Drivers

Rating Linked to Parent: CSCI's ratings are notched down from our assessment of the creditworthiness of COHL. We assess COHL's legal incentive to support CSCI as 'Medium' given the cross-default clauses in COHL's bank loan documents, where CSCI's default will lead to acceleration at the COHL level. We also assess COHL's strategic and operational incentive to support CSCI as 'Medium' given its financial contribution to the parent and its position as the parents' key platform for the construction of social housing. CSCI made up 20%, 14% and 20% of COHL's revenue, EBITDA and debt in 2021, respectively.

Strong Growth in 2022: Fitch expects CSCI's revenue to rise by 25% to around HKD96 billion in 2022, on the significant growth in the Hong Kong and Macau businesses. Revenue from Hong Kong rose by 120% yoy in 1H22 as CSCI undertook more public-health related construction projects. We expect CSCI's revenue growth to remain in the mid-to-high single digits over 2023-2025. CSCI's contract backlog/revenue ratio remained healthy at 3.0x for the 12 months to June 2022, underpinning sustained revenue expansion in the future.

Deleveraging on Improved Cash Flows: We expect CSCI's leverage, measured by net debt to EBITDA, to improve towards 4.5x over the next few years, driven by improving cash flow from operations (CFO) and decreasing cash investments in public-private partnership (PPP) projects. CSCI has been reducing its exposure to PPP projects over the last two years, and some of these projects have been completed and have started to generate cash inflow, which offset cash outflows for PPP projects under construction.

CSCI's CFO has been improving over the last 18 months. We believe the improvement is partly driven by the company's increased participation in government-targeted repurchase (GTR) projects, which have faster turnover than PPP projects. Strong growth in Hong Kong and Macau, where construction fees are typically pre-paid, also helped to improve cash flows.

Derivation Summary

CSCI's ratings are notched down from our internal assessment of its parent COHL's creditworthiness, based on our Parent and Subsidiary Linkage Rating Criteria and our assessment of 'Medium' legal, operational and strategic incentives for its parent to provide support. Its rating is not derived from its Standalone Credit Profile and therefore is not comparable with industry peers.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Revenue growth of 25% in 2022 and 5%-8% in 2023-2025;

EBITDA margin stable at around 12% in 2022-2025;

Capital intensity of 0.9% in 2022-2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improvement in the credit profiles of CSCI's parents;

Stronger linkages between CSCI and its parents.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Weakening of the credit profiles of CSCI's parents;

Weaker linkages between CSCI and its parents.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: CSCI had HKD24 billion in readily available cash at end-2021, against short-term debt of HKD15 billion (including perpetual capital securities). We expect the company's cash on its balance sheet and undrawn bank facilities of around HKD50 billion to provide more than adequate liquidity.

Issuer Profile

CSCI is one of the largest general contractors in Hong Kong and Macau. It also engages in integrated urban investment projects in mainland China.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

CSCI's rating is derived from its strong parental linkages. CSCI is 65%-owned by COHL, which is wholly owned by CSCEC.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire