Fitch Ratings has upgraded
The Outlook is Negative. SZE's underlying credit profile remains unchanged at 'bbb'. The ratings have been removed from Under Criteria Observation (UCO).
The upgrade follows the upgrade of the IDR of SZE's parent,
RATING RATIONALE
SZIH holds a 51.56% controlling interest in SZE. On a standalone basis, SZE's 'bbb' underlying credit profile is stronger than SZIH's underlying credit profile of 'bbb-'. Still, Fitch believes government support is likely to extend to SZE, which links its IDR to the parent's supported IDR in our assessment of the parent and subsidiary's linkage. SZE's IDR is equalised with SZIH's IDR as Fitch has assessed that SZE has 'High' strategic and 'Medium' operational ties with SZIH.
Fitch assesses SZE's underlying credit profile at 'bbb' based on its robust expressway portfolio, which comprises high-quality assets with a larger commuter base mainly in
SZE's toll traffic continued to demonstrate resilience after its swift recovery following the toll-fee exemption period in 2020. SZE's 2021 daily toll traffic, excluding the newly opened
Several changes in the toll rate policy, including the Differentiated Toll Collection Policy and a change in vehicle classification for toll fees, dampened toll revenue growth in 2021. Nevertheless, we expect the operator to benefit from the new toll system in the long run as this would ease congestion and improve traffic efficiency.
KEY RATING DRIVERS
Criteria Update Leads to Equalisation: Our updated Parent and Subsidiary Linkage Rating Criteria introduced a new prescriptive notching grid to determine rating outcomes. This is based on an assessment of tailored factors that describe the linkage characteristics, depending on whether the stronger entity is the parent or the subsidiary. Caps may apply in certain circumstances.
Unlike the previous criteria, 'top-down minus two', 'top-down minus three' and 'bottom-up plus three' outcomes under the 'stronger parent' path have been removed. SZE is now notched 'top-down minus one' based on 'Weak' legal, 'High' strategic and 'Medium' operational linkages. This allows for SZE's IDR to be equalised with that of the parent as SZE's underlying credit profile is one notch below SZIH's supported IDR, which benefits from the likelihood of state support flowing to SZE.
Strategic, Robust Expressway Network - Revenue Risk (Volume): High Midrange
The majority of SZE's expressways are strategically spread across the wealthy
Toll rates on the network are generally low due to restrictions, with the government occasionally imposing reductions. Volume risk is constrained to 'High Midrange' due to SZE's rising exposure to non-toll road businesses, which have slightly different risk profiles from its core toll-road business. Fitch does not expect meaningful EBITDA contribution from non-toll road businesses in the near term. However, should there be changes in the EBITDA trend, we will reassess SZE's risk profile.
Opaque Regulatory Framework - Revenue Risk (Price): Weaker
The price risk is a weaker attribute due to lack of transparency and predictability in the regulatory framework. Toll-rate setting and adjustments are highly regulated by the government with limited flexibility for toll-road operators to recover higher costs due to inflation. Most of the prevailing toll rates have been unchanged for a number of years with no visibility of any increases in the future.
The government has imposed adverse policies such as tariff cuts and toll exemptions, resulting in a decline in the average toll rate. That said, we believe these policies will reduce congestion on road networks and boost traffic, which will in turn benefit the company in the long run.
Highly Defined, Flexible Capex Plan -
SZE has considerable experience and expertise in delivering on its network investment. Its planned capex over the next three years is substantial, amounting to about
Non-Amortising Uncovenanted Debt - Debt Structure: Midrange
SZE's debt structure is typical of a Chinese corporate borrower as it is funded by non-amortising debt with few of the protective covenants that would be commonly seen in a project finance-type structure. Refinancing risk is mitigated by the company's ample liquidity, comprising cash and significant standby bank facilities, a well-diversified schedule of bullet maturities, a record of prudent debt management and solid access to the capital market.
Interest risk exposure to the country's benchmark lending rate and loan prime rate is manageable because adjustments to the two rates are infrequent and we do not expect them to rise in the near term. Nevertheless, we have considered the risk in our rating case by adding a stress of 200bp on the existing rate.
PEER GROUP
SZE compares well with
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Downgrade of SZIH's rating, provided our assessment of the linkage between SZE and SZIH remains unchanged
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade of SZIH's rating, provided our assessment of the linkage between SZE and SZIH remains unchanged
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 '
CREDIT UPDATE
SZE's total revenue, excluding construction service arrangement revenue, increased by 16% in 2021. Toll revenue accounts for 63% of SZE's revenue, while renewable and solid waste-management segments contribute 8% and 12%, respectively.
Its toll revenue from existing projects, excluding the newly opened Phase I of the
Capex was around
FINANCIAL ANALYSIS
Fitch's base case (FBC) considers SZE's projected performance for each asset, according to the company's assessment of economic prospects, development of surrounding networks, competing modes of transport as well as the maintenance and expansion plan for the company's assets and those of competing roads.
The FBC forecasts stagnant growth in toll revenue for 2022 in light of continued strict pandemic-related lockdown and control measures in
SZE expects its solid-waste management and wind power-related businesses to maintain healthy growth in the medium term before stabilising with more of its newly acquired and developing projects coming online.
The acquisition of SIICH was completed in
The Fitch rating case takes a more conservative view and incorporates a number of stresses, mainly haircuts of 2% on base case revenue and the EBITDA margin, a 200bp increase in floating interest rates, a 5% increase in capex and a 5pp increase in the dividend payout ratio
The base case shows net leverage of 3.9x in 2023, which we expect to decline gradually to 3.0x in 2025. The projected five-year average net leverage ratio is 3.4x.
The rating case shows high net leverage of 4.4x in 2023, which we expect to decline gradually to 3.8x in 2025. The projected five-year average net leverage ratio is 4.1x.
ASSET DESCRIPTION
SZE was incorporated in 1996 and is headquartered in
SZE operated and invested in a total of 17 toll highway projects, of which 11 are controlled projects. The attributable mileage of the highways invested in or operated by the company is approximately 633km, of which 5.7km is still under construction. The average concession life is about 11 years. SZE also participates in various regional urban infrastructure development projects, invests in more than 15 environmental protection, clean energy and finance projects. SZE is listed on the
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.
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
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