Fitch Ratings has affirmed
The Outlook is Negative.
RATING RATIONALE
SZIH's IDR incorporates a two-notch uplift from its standalone credit profile (SCP) under Fitch's Parent and Subsidiary Linkage Rating Criteria.
SZIH's SCP reflects the combined credit profile of its toll-road operations, and its environmental protection and logistics businesses. The toll-road portfolio is owned and operated by its 51.56%-owned subsidiary,
The Negative Outlook reflects our expectation that net leverage will remain high in the medium term, driven by a pandemic-related decline in EBITDA in 2022, reliance on short-term debt and previous debt-funded expansions.
Fitch expects deleveraging to commence when new assets begin to contribute meaningful income and management's effort to monetise the company's assets start to crystallise. This includes spinning off its logistics assets gradually through the establishment of infrastructure REITs as well as redevelopment of certain logistics parks earmarked for urban development, such as the
These real-estate developments are likely to mirror SZIH's past real-estate involvement in
Following the termination of SZE's public-private partnership (PPP) arrangement for the
KEY RATING DRIVERS
Moderate Linkage with Parent
Strategic, Robust Expressway Network - Revenue Risk (Volume): High Midrange
The volume risk reflects the company's robust expressway portfolio and the higher risks faced by its logistics and environmental protection businesses. SZE operates a medium-scale expressway network in
The logistics business, however, has higher execution risks than the toll-road business. The company's increasing efforts to expand in logistics limits volume risk to 'High Midrange'.
Opaque Regulatory Framework - Revenue Risk (Price): Weaker
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. However, we believe these policies will reduce congestion on road networks and boost traffic, which will benefit the company in the long run.
Large-Scale, Debt-Funded Capex Plan -
We forecast SZIH's capex to be substantial, particularly in the next one to two years, with major expansion of existing toll roads as well as construction and upgrades of logistics parks to include cold-chain and smart-warehouse features. The medium-term capex plan is well-developed and detailed. SZE has long experience and expertise in delivering results for investments in its expressways, while SZIH has extensive experience in building and operating logistics parks and hubs. We expect the planned capex to be largely funded by debt, which is likely to strain SZIH's leverage in the medium term.
Non-Amortising Uncovenanted Debt - Debt Structure: Midrange
SZIH'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.
Currency risk arising from its US dollar bonds is substantially hedged. Interest-rate risk relates to the country's benchmark lending rate and the loan prime rate set by
Financial Profile
We expect SZIH's logistics business growth in the medium term to be largely driven by the addition of new logistics parks, although occupancy and rental rate growth are likely to be modest in the near term due to a slowdown in the global manufacturing sector and exports in
Fitch's base case (FBC) assumptions are largely in line with management's forecast. It projects about 3% yoy revenue growth for SZIH's logistics business in the next two years on weaker port performance. We expect higher yoy revenue growth (about 10% to 15%) between 2025 and 2027 as several larger logistics parks commence operation, such as the Yantian and Pingshan projects. The average EBITDA margin will be around 50%. We expect
Fitch's rating case (FRC) takes a more conservative stand and incorporates a number of stresses, with logistics revenue in 2023 to remain at the 2022 level. Fitch has assumed an almost 50% discount on
We have not taken into consideration income contribution and capex for the redevelopment of the
The FBC and FRC also do not factor in revenue growth and capex arising from the
FBC net leverage is expected to drop significantly to 4.0x in FY23 due to dividend contribution arising from Qianhai's divestment. Net leverage will peak at 5.1x in 2024, before declining gradually below 4.5x in FY25. The projected five-year average net leverage is 4.5x.
Similar to the FBC, FRC net leverage is expected to drop significantly in FY23, peak at 5.8x in 2024, then decline to around 5.5x in FY25. The projected five-year average net leverage is 5.3x.
PEER GROUP
SZIH's closest peer is
YXT's infrastructure development and renewal factor is assessed as 'Stronger' because of its smaller scale and lower complexity, while SZIH's is limited to 'Midrange' because of its substantial debt-funded investment plan. SZIH's elevated net leverage in the medium term demonstrates a weaker financial profile than YXT, justifying its weaker SCP. Under the FRC, YXT's five-year average net leverage is 3.8x.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Weakening of linkages between SZIH and SIHC;
Deterioration in SZIH's SCP credit profile with net debt/EBITDA higher than 5.5x on a sustained basis, provided the linkage between SZIH and SIHC remains intact.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Strengthening of linkages between SZIH and SIHC, provided SZIH's SCP stays intact;
SZIH's SCP is not expected to improve in the medium term due to the group's significant investment plans.
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
Overall revenue in FY22 fell by 16% yoy, mainly due to SZE's weaker performance. SZIH's logistics parks, however, recorded 14% yoy revenue growth in FY22, benefiting from several acquisitions of operational logistics assets in the past two years and launches of new logistics parks.
SZIH's net leverage increased to 6.7x in 2022, from 4.9x in 2021, as a result of major acquisitions and aggressive expansion plans over the past few years. This includes the acquisition of
Short-term debt obligations rose to 55% of total debt in FY22, from 37% in FY21, largely contributed by SZE. However, liquidity risk is mitigated by SZIH's solid access to capital markets, as well as adequate cash and unused credit facilities to cover its debt obligations in FY23.
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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