Fitch Ratings -
The Outlook is Stable. Fitch has also upgraded to 'A' from 'A-' the
The notes are unconditionally and irrevocably guaranteed by
The upgrade is the result of a higher support score assessment for SDH after the publication of Fitch's final Government-Related Entities Rating Criteria and Public Policy Revenue-Supported Entities Rating Criteria on
KEY RATING DRIVERS
Support Score Assessment 'Virtually certain'
The support score is a combination of our assessment of the government's responsibility and incentive to support.
Responsibility to Support
Decision Making and Oversight 'Very Strong'
The
Precedents of Support 'Strong'
Most of the provincial government's support has been geared towards SDH's transport infrastructure and power generation subsidiaries to facilitate their capital-intensive investments. The support is primarily via capital injections and tax revenue transfers, as well as special funds and interest subsidies to enhance SDH's financial flexibility. Total support from 2018-2022 reached
Incentives to Support
Preservation of Government Policy Role 'Strong'
SDH has high policy intensity and holds strategically important assets, which means a default of the company could be attributed to the provincial government's leadership, with grave political repercussions. A large portion of the portfolio held by SDH is infrastructure that is critical to the province, including railways, toll roads, power generators and local airline groups. Most of SDH's investees are dominant in their industries.
The company's consolidated profit before tax contributed more than 80% of the total profit before tax of the entities supervised by the Sichuan SASAC in 9M23. Its infrastructure assets are not likely to be liquidated if it defaults, but the loss of its shareholding in businesses such as power generation and other listed companies could significantly hamper the profitability of
Contagion Risk 'Very Strong'
SDH is assessed as a strategic investment holding company under our new criteria and, therefore, we do not regard the low proportion of its parent-level debt as a constraint on the factor assessment. Under the old criteria, the financial implications of a default were assessed as 'Strong' because its parent-level debt only made up about 13% of consolidated debt, which limited its position as a proxy financing vehicle for the
Our new criteria consider SDH's role as the dominant shareholder in most provincial-level GREs, making it a reference issuer, which means investors regard its debt issuance as an indication of the provincial government's ability to access financing. Its total assets accounted for 75% of those directly supervised by the
Standalone Credit Profile
SDH's Standalone Credit Profile (SCP) of 'b+' is based on a 'Midrange' risk profile, 'b' financial profile, and high positioning among peers.
Risk Profile: 'Midrange'
Fitch assesses SDH's risk profile at 'Midrange', reflecting the combination of assessments below:
Revenue Risk: 'Midrange'
'Midrange' Demand Characteristics
Most of SDH's investees are geographically concentrated in the
'Midrange' Pricing Characteristics
SDH, as the controlling shareholder of many investees, has the capacity to increase its dividends, although this may affect the quality of its assets if the increase is frequent. Adjusted revenue has been stable, which also points towards 'Midrange' pricing characteristics.
Expenditure Risk: 'Midrange'
'Midrange' Operating Costs
SDH has strong access to the capital market, as well as adequate financial resources in the province, as
'Midrange' Investment Planning
SDH has a mechanism for investment planning throughout the different stages of investment life. Exits or cashing out of investments have not been frequent as most of its stakes are meant to be held for the long term. Impairment losses have been moderate. Most of its portfolio companies can achieve self-sufficiency in cash flow.
Liabilities and Liquidity Risk: 'Midrange'
We assess both debt and liquidity characteristics as 'Midrange'. SDH had a relatively balanced maturity profile at
Financial Profile 'b'
SDH's parent-level financial profile is assessed at 'b', mainly constrained by its stretched leverage of 23.2x at end-2022, higher than the threshold of 18x. Leverage is likely to stay at a slightly higher level in 2023-2027. Its loan-to-value ratio was 62.6% at
Derivation Summary
SDH is rated under Fitch's Government-Related Entities Rating Criteria and is credit-linked to our internal assessment of the creditworthiness of the
Debt Ratings
The 'A' rating on SDH's
The instrument ratings are linked to Fitch's internal assessment of SDIH in light of the guarantee. The internal assessment of SDIH is derived under Fitch's new GRE criteria.
Issuer Profile
SDH is a wholly state-owned company founded by the
Summary of Financial Adjustments
Fitch has reclassified SDH's parent-level investment income as recurring income and included it in the calculation of EBITDA, to reflect the nature of SDH as a strategic investment holding company.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A significant weakening of the contagion risk of a default, or deterioration in our assessment of the government's precedents of support or preservation of government policy role, or a dilution of the government's control or weaker oversight;
A deterioration of
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Improvement in Fitch's internal assessment of the
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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