Fitch Ratings has assigned
The Outlook is Stable.
RATING RATIONALE
The bonds are rated at the same level as ZJE's senior unsecured rating because they constitute its direct and senior unsecured obligations.
The ratings are equalised with the ratings of ZJE's parent,
Fitch assesses the underlying credit profile of ZJE at 'bbb+', which reflects the credit quality of ZJE's toll-road business and the securities business operated by its subsidiary,
We assess the toll-road business under our
Nevertheless, the business diversification meant the company was less affected by the coronavirus pandemic in 2020, when the toll-road business was hit badly by a 79-day toll holiday. The financial profile of the toll-road business is robust with five-year average net debt/EBITDA at 2.5x in Fitch's rating case.
KEY RATING DRIVERS
Strong Linkage with Parent
ZJE is a strategically important subsidiary of CICO and is highly integrated with the parent's core business. CICO has consistently provided tangible support to the subsidiary, including injecting 89% of the toll roads controlled by ZJE from 2013. We expect the support to continue. ZJE accounted for 55% of CICO's net profit and 41% of EBITDA in 2019, which we deem substantial. ZJE is CICO's only listed platform outside of mainland
ZJE and ZSS are pioneers in infrastructure REITs in
Exposure to More-Volatile Securities Business
Fitch considers ZSS a mid-tier Chinese securities firm with a moderate franchise. Its business model is more reliant than that of peers on more-volatile capital market activity and it has a higher risk appetite. ZSS also operates in a developing, but improving, regulatory environment. Asset quality has the potential to be more volatile through economic cycles with potential losses from unexpected market shocks. Its earnings and profitability profile is weaker than that of higher-rated peers and susceptible to market changes in light of its reliance on the brokerage, proprietary trading and futures-related business. However, the potential losses stemming from credit and market risks are mitigated by its lower leverage.
Large, Robust Network, Proven Traffic - Volume Risk: Stronger
The 'Stronger' volume risk is supported by the robustness of ZJE's road network, which has a long operating history and strong traffic growth. Most of its assets are essential roads with large commuter bases and limited alternatives. The traffic on its two flagship roads have risen by a CAGR of 7% since 2001. ZJE's traffic volume was resilient through the Covid-19 crisis and quickly returned to pre-crisis levels as early as
Limited Tariff-Setting Ability, Government Intervention - Price Risk: Weaker
The price risk is constrained by the lack of transparency and predictability in the regulatory framework, compared with more robust regulatory environments that provide more protection to investors. All toll roads in
However, we believe the regulatory environment in
Well-Maintained Network, Low and Predictable Capex - Infrastructure/Renewal: Stronger
ZJE's road network is well-maintained and in good condition. Management has considerable experience in managing and operating the network. The company has successfully delivered large expansion projects. ZJE develops a detailed capital and maintenance plan for each road in advance every year. Most of the maintenance works are of low complexity and highly predictable. Capex in the next three years will be low and mainly sourced from internally generated cash flow.
Corporate Borrower, Limited Refinance Risk - Debt Structure: Midrange
ZJE's debt structure is typical of a Chinese corporate borrower as it is funded by non-amortising debt with few of the protective covenants typically seen in project finance structures. Refinancing risk is mitigated by the company's ample liquidity, comprising cash and significant standby bank facilities, and a record of prudent debt management and solid access to funding channels. About 29% of ZJE's debt at
PEER GROUP
The closest peers to ZJE are
YXT and SZE are established companies that own and operate toll roads in
Unlike ZJE and SZE, YXT is highly focused on toll-road operations. It has geographical diversity and a longer remaining concession life. Fitch's rating case projects the average five-year net leverage of SZE and YXT at 4.2x and 4.9x, respectively. SZE's lower net leverage and stronger volume assessment justify a rating that is a notch higher than that on YXT. The leverage profile of ZJE's toll-road business is much stronger than SZE's, but its underlying credit profile is only one notch higher than that of SZE due to its exposure to the riskier securities business.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on CICO, provided the linkages between CICO and ZJE remain intact.
An upgrade is unlikely, as ZJE's ratings are currently in line with the Chinese sovereign rating (A+/Stable).
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on CICO, provided linkages between CICO and ZJE remain unchanged.
Weakening of linkages between CICO and ZJE
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 '
TRANSACTION SUMMARY
ZJE is the largest listed toll-road operator in
ZJE also owns 40.34% of ZSS, a medium-sized securities firm listed on the
The proceeds from the issuance of the US dollar notes will be used for debt refinancing and general corporate purposes.
FINANCIAL ANALYSIS
Fitch has developed a base case and rating case to analyse the financial profile of ZJE's toll-road business (excluding ZSS), incorporating management's projections, Fitch's own assumptions and peer analysis.
The management case assumes a substantial rebound in revenue in 2021 after the 18% drop in 2020 due to the Covid-19 pandemics, which is supported by the traffic recovery in 1H21. The management case projects single-digit organic traffic growth from 2022, in line with its forecast for GDP growth in
The Fitch base case applies a 5% haircut to revenue, reduces the EBITDA margin by 2pp, stresses capex by 5%, and adds 200bp to variable interest rates. The Fitch base case results in a net debt/EBITDA of 2.0x on average for the forecast period.
The Fitch rating case applies an additional 5% stress to the revenue, another 3pp reduction in the EBITDA margin and a further 5% stress to capex compared with the base case, which leads to net debt/EBITDA of 2.5x on average for the forecast period.
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