Fitch Ratings has upgraded China Shandong Hi-Speed Financial Group Limited's (CSFG) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'A-' from 'BBB+'.

Fitch has also upgraded to 'A-' from 'BBB+' a tranche from the medium-term note programme with a keepwell and equity interest purchase undertaking from Shandong Hi-Speed Group Co., Ltd. (SHS, A/Stable) and guarantee from CSFG - a drawdown of USD200 million 3.95% senior unsecured bond due May 2024. The notes were issued by CSFG's wholly owned subsidiary, Coastal Emerald Limited.

The upgrade follows the reassessment under the updated Parent and Subsidiary Linkage (PSL) Rating Criteria, published on 1 December 2021. Fitch has also removed all the ratings from Under Criteria Observation (UCO), on which they were placed on 7 December 2021, and put the ratings on Rating Watch Evolving (RWE) as the acquisition may lead to stronger linkages with SHS or dilute them. Fitch expects to resolve the RWE within six months following the revision of additional information from CSFG.

CSFG, listed on the Hong Kong stock exchange (HKEX: 412) since 1992, is 43.42%-owned by SHS and is focused on financial asset investment.

Key Rating Drivers

Major Acquisition: The rating actions come after CSFG's announcement in March 2022 of a major assets acquisition of Beijing Enterprises Clean Energy Group (BECE, HKEX: 1250). The transaction and board reorganisation were completed on 19 May 2022. CSFG became BECE's largest shareholder, holding 43.45% shares of BECE, and took control. BECE's main business includes solar and wind power, hydroelectric power generation, clean heating and other clean energy.

The acquisition is a part of CSFG's strategy transformation from financial investment platform to industrial investment platform. CSFG's business profile and financials will be significantly different from the current position. The RWE reflects our view that the CSFG's rating could be upgraded or downgraded, depending on the outcome and our assessment of CSFG's linkage with SHS, which is assessed under our PSL criteria.

Parental Support Drives Ratings: Fitch believes SHS has a 'Medium' legal incentive, ' Medium' strategic incentive and 'Medium' operational incentive to support CSFG. Under our PSL criteria, these assessments lead to one notch down from of CSFG's rating from SHS.

Parent-Subsidiary Linkage: SHS indirectly held CSFG via two other offshore subsidiaries - Shandong Hi-Speed (Hong Kong) International Capital Limited holding a 22.66% stake and Shandong International (Hong Kong) Limited holding a 20.76% stake. The majority of CSFG's board and senior management is appointed by SHS and its business is conducted under the parent's direction. The issuer's financials are also consolidated into those of its parent.

Medium Legal Incentive: SHS has guaranteed, on average, slightly more than 50% of CSFG's total debt in past three years, rising to 65% as of May 2022, and it should be fluid with the assets acquisition and further operations. Other legal ties include keepwell plus equity interest purchase undertaking (EIPU) by SHS for the bonds. The assessment of the legal incentive is 'Medium' rather than 'High', considering the percentage of guaranteed debt has not reached a stable major portion.

Medium Strategic Incentive: SHS positions CSFG as a first-tier subsidiary and a key offshore financial investment platform. The company is involved in the parent's offshore business strategy. The acquisition of BECE means CSFG is transforming to the key industrial investment platform with renewable energy industry as the major investment direction. The acquisition is approved by SHS and the Shandong provincial State-owned Assets Administration Commission. The strategic role in renewable energy is in line with SHS's core business and the province's strategy.

We expect a moderate growth potential of CSFG's future business, taking into consideration the early stage of transformation and further detailed operating integration has yet to be established. The moderate competitive advantage and growth potential mitigate the assessment of low financial contribution. The assessment of the strategic incentive may change depending on the future development and performance of its business, given strategy transformation is ongoing.

Medium Operational Incentive: We assess both operational synergies incentive and management and brand incentive as 'Medium'. For the latter, the chairman of CSFG also act as SHS's executive director. Key operations and financing decisions need to be approved by SHS. CSFG operates under the name of Shandong Hi-Speed Group. Short-term substitution of CSFG would be difficult, as CSFG is pointed as a key industrial investment platform and is undergoing strategic change with the acquisition.

RATING SENSITIVITIES

The RWE could be resolved upon review of the issuer's finances and other information enabling Fitch to assess the direction of the linkages with the parent company SHS.

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

Stronger legal, strategic and operational incentives for SHS to support CSFG could narrow the rating gap between CSFG and SHS;

Positive rating action on SHS;

Any positive change in CSFG's IDR would lead to similar rating action on the tranche from the medium-term note programme guaranteed by CSFG.

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

Weakening of SHS's legal strategic and operational incentives to support CSFG, including lower competitive advantage and growth potential to the parent or less common management and operation integration;

Dilution in the parent's shareholding;

Negative rating action on SHS;

Any negative change in CSFG's IDRs would lead to similar rating action on the tranche from the medium-term note programme guaranteed by CSFG.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three 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

Debt Structure: Total debt was HKD13.9 billion as of end-2021, of which 74% was due to mature within one year. Bonds made up 57% of the total debt and bank loans 31%. The acquisition of BECE is at a cost of around HKD4.7 billion. Financing for the acquisition will increase CSFG's debt.

Issuer Profile

CSFG is a first-tier subsidiary and a key offshore financial investment platform of SHS. Financial assets were over 50% of the total assets as of end-2021, and made up of listed and unlisted debt and equity investments, followed by loan receivables (16%) and finance lease receivables (4%). Net assets were about HKD8.6 billion, including HKD7.1 billion in perpetual bonds.

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

The ratings of CSFG are linked to those of SHS.

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

RATING ACTIONS

Entity / Debt

Rating

Prior

Coastal Emerald Limited

senior unsecured

LT

A-

Upgrade

BBB+

China Shandong Hi-Speed Financial Group Limited

LT IDR

A-

Upgrade

BBB+

LC LT IDR

A-

Upgrade

BBB+

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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