Fitch Ratings has affirmed China State Construction Engineering Corporation Ltd's (CSCEC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A'.
The Outlook is Stable.
CSCEC's support score of 30 points out of a maximum 60 and a Standalone Credit Profile (SCP) of 'bbb+' results in CSCEC being rated one notch below China's sovereign rating (A+/Negative) under our Government-Related Entities (GRE) Rating Criteria.
We regard CSCEC's state-owned parent, China State Construction Engineering Corporation, as an intermediate holding company with no material operation or substantial debt. Therefore, we look through China State Construction Engineering Corporation to the Chinese sovereign under our GRE criteria.
Key Rating Drivers
'Strong' State Decision-Making, Oversight: CSCEC was 57.02% owned by China State Construction Engineering Corporation, a wholly owned subsidiary of China's State-owned Assets Supervision and Administration Commission (SASAC), at end-1H24. CSCEC accounts for almost all of its parent's revenue, profit, debt and assets. The SASAC has stringent oversight of CSCEC via China State Construction Engineering Corporation, exerting significant influence on CSCEC's principal operations, strategic direction and investment choices, reinforced by shared top-level management.
'Strong' Precedents of Support: CSCEC benefits from consistent financing provided by policy and state-owned banks to support its growth in China and internationally. CSCEC's subsidiaries completed a series of debt-to-equity swaps with support from the government and major state-owned financial institutions during 2019-2021. The state has also provided substantial tangible support to CSCEC, including government grants.
'Strong' Support Incentives: We assess the preservation of government policy role as 'Strong' for CSCEC. It is China's largest housing builder, with projects ranging from social housing and healthcare facilities to manufacturing plants and education venues. It also has leading positions in certain infrastructure segments, such as airports, urban utility tunnels and nuclear power plants, and is a key participant in China's 'Belt and Road' initiative. We believe a default by CSCEC could disrupt China's housing and infrastructure construction market and thwart its geopolitical 'Belt and Road' initiative goals.
'Strong' Contagion Risk: The company and its subsidiaries are active domestic and offshore bond issuers. CSCEC is also a high-profile Chinese state-owned engineering and construction (E&C) firm internationally. We believe its default significantly affect funding for other central state-owned enterprises.
SCP of 'bbb+': Our assessment of CSCEC's SCP reflects its leadership position and unrivalled scale in the E&C market, which is further supported by a diversified business portfolio and solid backlog/revenue ratio. CSCEC's scale and market presence give it an advantage in the bidding process, domestically and internationally, and limits its exposure to a single project's failure or loss. Meanwhile, its customer diversification lowers its risk profile.
CSCEC is China's largest contractor and, according to Engineering News Record, is also the world's biggest, with more than USD300 billion in consolidated sales and over USD500 billion of newly signed E&C contracts in 2023. We also take into account the SCP of its listed subsidiary, China Overseas Land & Investment Limited (COLI, A-/Stable), one of China's top homebuilders, in determining CSCEC's SCP. COLI's SCP of 'bbb+' is supported by its market leadership, a healthy financial structure and sustained financial flexibility, despite the country's prolonged property sector slowdown.
Non-Residential Projects Support Revenue: We expect non-residential projects to drive CSCEC's construction revenue growth in the next few years. Residential housing project contracts have been declining since 2021 amid sustained property market stress, leading CSCEC to shift to projects in infrastructure, industrial buildings, municipal facilities and energy. This saw the share of residential projects in CSCEC's new E&C contracts drop to 15% in 1H24 and 17% in 2023, from 36% in 2020. We believe its exposure to residential projects may fall further if the property market remains weak.
Leverage to Stabilise: We expect EBITDA net leverage, after deconsolidating COLI, to remain below 4x in the medium-term on fewer public-private partnership (PPP) projects, steadier working capital flows and sustained EBITDA growth. EBITDA net leverage reached around 4x in 2023 and may rise further in 2024 on working capital outflow, as cash collection from customers has slowed.
However, we expect slightly lower receivable days from 2025, as China's operating environment improves and CSCEC continues to clear outstanding receivables and reduce its exposure to customers with weak credit profiles. CSCEC also retains strong funding access and we forecast EBITDA interest coverage to stay above 4.5x (after deconsolidating COLI) in the medium term.
Shifting Investment Focus: We anticipate a reduction in CSCEC's investments in PPP projects as China transitions to a new PPP regulatory framework that significantly limits the range of eligible projects. CSCEC did not sign any PPP projects in 1H24 and only one project in 2023, with an attributable investment of about CNY890 million. This was against 26 new projects in 2022 investments nearing CNY65 billion. CSCEC has instead been expanding its investment in residential property outside of its key homebuilding subsidiary, COLI. This may impact its working capital and cash flow generation.
Derivation Summary
CSCEC's IDR is above that of other large centrally administered state-owned construction companies in China, such as China Railway Group Limited (CRG, A-/Negative, SCP: bb-) and China Communications Construction Company Limited (CCCC, A-/Negative, SCP: b+). The one-notch difference is driven by CSCEC's stronger SCP, which results in its rating being notched one level below China's sovereign rating under our GRE rating criteria. CSCEC is larger than the two peers in terms of operation scale and enjoys a stronger financial profile (after deconsolidating COLI), with lower leverage and better coverage.
CSCEC's SCP is above that of Shanghai Construction Group Co., Ltd (BBB+/Negative. SCP: bbb-) given its larger operation scale, more diversified geographical presence and better interest coverage.
CSCEC's support scores are the same as those of other large SASAC-owned E&C companies with dominant positions in their niche market segments, such as CRG, which enjoys a duopoly position in China's railway construction market, and CCCC, a leader in transport infrastructure, including roads, waterways and ports.
Key Assumptions
Fitch's Key Assumptions Within our Rating Case for the Issuer
Revenue growth of 5.4% in 2024 and 1.6%-4.9% annually in 2025-2027 (after deconsolidating COLI);
EBITDA margin of 4.9%-5.0% in 2024-2027 (after deconsolidating COLI);
Annual capex of CNY20 billion-24 billion in 2024-2027 (after deconsolidating COLI);
No acquisitions or divestitures.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Increasing likelihood of support from the Chinese sovereign.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Decreasing likelihood of support from the Chinese sovereign.
Increasing investment in non-COLI property business or expansion in PPP and build-operate-transfer projects, leading to sustained deterioration in CSCEC's FCF generation (after deconsolidating COLI).
EBITDA interest coverage below 3.0x or EBITDA net leverage above 4.0x for a sustained period (after deconsolidating COLI).
Liquidity and Debt Structure
Sufficient Liquidity: CSCEC, after deconsolidating COLI, had around CNY200 billion in short-term debt at end-2023, which would be covered by available cash of over CNY220 billion and unused banking facilities of around CNY2 trillion, including CNY49 billion of COLI's unused bank facilities. The facilities are uncommitted, as committed facilities are uncommon in China's banking system.
COLI had readily available cash of CNY84.5 billion and restricted cash, including regulated pre-sale proceeds, of CNY21.1 billion at end-2023. This was sufficient to cover short-term debt of CNY41 billion, including capital-market debt that is puttable in 2024. We expect the group to maintain strong liquidity to fund development costs, land-premium payments and debt obligations, given its diversified onshore and offshore funding channels, long-term relationships with banks and financial institutions, and a flexible land-acquisition strategy.
Issuer Profile
CSCEC is the world's largest construction company by revenue, with a presence in over 100 countries. Over half of its construction projects are in China's economically developed region. The company is headquartered in Beijing and has over 380,000 employees.
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.
Public Ratings with Credit Linkage to other ratings
CSCEC's IDR is notched down from China's sovereign rating under our GRE criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
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 www.fitchratings.com/topics/esg/products#esg-relevance-scores
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