SHENZHEN INTERNATIONAL HOLDINGS LIMITED
Fitch Ratings has upgraded
The Outlook is Negative. The underlying credit profile remains at 'bbb-'. The ratings have been removed from Under Criteria Observation (UCO).
The upgrade reflects the application of Fitch's updated Parent and Subsidiary Linkage Rating Criteria on SZIH's IDR, which was placed on UCO following the publication of the updated criteria on
RATING RATIONALE
SZIH's IDR incorporates a two-notch uplift from its underlying credit profile. This reflects 'Medium' operational and strategic ties between SZIH and its holding company,
SZIH's underlying rating reflects the combined credit profile of its toll-road operations, and environmental protection and logistics businesses. SZIH's toll-road portfolio is owned and operated by its 51.56%-owned subsidiary,
The Negative Outlook reflects our expectation of limited rating headroom as we forecast net leverage will be elevated due to SZIH's largely debt-funded expansion and acquisitions, and limited near-term EBITDA contribution from its recently acquired assets under development.
Many of SZIH's port and existing logistics projects are still in their early stages of development after the company acquired the land. SZIH has also been acquiring logistics parks and companies that are already in operation as part of its expansion due to land scarcity in economically developed and high growth regions. These projects would typically generate steady income after their acquisition, which minimises SZIH's exposure to construction and demand risk.
Fitch expects deleveraging to commence in 2027 when new assets begin to contribute meaningful income and management's effort to monetise the company's assets start to crystallise.
On the other hand, Fitch believes the dilution of SZIH's interest in its real-estate projects will benefit its credit risk profile. This will minimise SZIH's exposure to volatile property prices and policy uncertainties while allowing it to recoup its initial investments through future dividend distributions. At the same time, SZIH can better allocate its resources to its core logistics business to generate steadier cash flows.
KEY RATING DRIVERS
Two-Notch Uplift on Criteria Update: Our updated Parent and Subsidiary Linkage Rating Criteria introduces 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. SZIH is now notched 'bottom-up plus two' from SIHC's IDR under the 'stronger parent' path, based on 'Weak' legal, and 'Medium' strategic and operational linkages with its parent. This reflects SIHC's moderate incentive to provide support to SZIH in case of need, driven by the subsidiary's strategic importance to the parent through its stable cash flow contribution, competitive advantages and high growth potential.
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 the logistics business limit the volume risk to the 'High Midrange' assessment.
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 increase 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 the road networks and boost traffic, which will in turn benefit the company in the long run.
Highly Defined, Flexible Capex Plan -
We forecast SZIH's capex to be substantial, particularly in the next one-to-two years, with major acquisitions, expansion of existing toll roads, construction as well as 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 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
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 is close to that of YXT, resulting in the same underlying credit profile. Under Fitch's rating case, YXT's five-year average net leverage is 4.9x.
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 underlying credit profile with net debt/EBITDA higher than 5.0x on a sustained basis, provided 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 the underlying credit profiler of SZIH stays intact;
SZIH's underlying credit profile 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
SZIH's total revenue, net of revenue from construction service arrangements, decreased by 14% in 2021, mainly due to lower revenue recognition from real-estate projects. SZE's total revenue, net of revenue from construction services arrangements, increased by 16% due to a lower base in 2020 as a result of a nationwide exemption of toll fee collection during the pandemic and contribution from the Outer Ring project, which started operations in
SZIH's logistics park business revenue increased by 56% in 2021 on a significant expansion of the total operating area. Its logistic parks also recorded a higher occupancy rate of 93% in 2021, from 91% in 2020, due to an increase in local production and a boom in e-commerce while borders remained shut in
SZIH has been reducing its exposure to the real-estate industry to better allocate resources to expand the operations of its core businesses. The company sold its 35.7% equity interest in Meilin Checkpoint project in 2021 for about
The company also sought to dilute its stake in the Qianhai project through the introduction of a strategic investor, Shenzhen Vanke, which has agreed to make a capital contribution of
SZIH's net leverage increased to 4.9x in 2021, from 3.3x in 2020, as a result of several major acquisitions and aggressive expansion in 2021. SZIH's borrowings comprised 30% secured debt at end-2021. Liquidity remains robust, with cash on hand of
FINANCIAL ANALYSIS
We expect SZIH's net leverage to remain elevated in the medium term, driven by major debt-funded acquisitions and its expansion plans, which include those of SZE. We expect net leverage to decline only after Fitch's five-year forecast horizon as SZIH's new projects start operating gradually.
SZIH plans to spin off its logistics assets gradually through the establishment of infrastructure REITs in the next few years, which would help improve its net leverage. That said, Fitch's base and rating cases do not account for any gains as the company has yet to identify the assets it plans to spin off.
Fitch's base and rating cases both show a slight improvement in net leverage in the near term as SZIH recoups its initial investment from its real-estate projects. Net leverage is 3.8x and 4.5x for the base and rating cases in 2023, respectively. Thereafter, Fitch's rating case net leverage will climb above 5.0x in 2024 and remain elevated.
The Negative Outlook reflects elevated medium-term leverage under Fitch's rating case from debt-funded capex.
The Fitch base case forecasts an average 10% growth in logistics park and port revenue. Its operating area should increase by 500-600 sqm a year. Fitch's forecast takes into account acquisition costs and income from logistics hubs to be acquired in
The Fitch rating case takes a more conservative stand and incorporates a number of stresses, mainly slower revenue growth of 8% in logistics services and ports. Fitch has assumed
ASSET DESCRIPTION
SZIH is incorporated in
The company owns four operating, well-equipped logistic parks and five under construction in
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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