Fitch Ratings has affirmed Lianyungang Port Group Co., Ltd.’s (LYGP) Long-Term Issuer Default Rating and senior unsecured rating of ‘BBB’. The Outlook is Stable.
Simultaneously, Fitch has affirmed the ‘BBB’ rating on the US-dollar notes due 2025 with a Stable Outlook. The notes are issued by Shanhai (Hong Kong) International Investments Limited and are unconditionally and irrevocably guaranteed by LYGP.
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We equalise LYGP’s rating with our internal assessment of Lianyungang municipality’s creditworthiness under our Government Related Entities (GRE) Rating Criteria, reflecting the integral linkage with government and the vital role the company plays in economic activities and social stability.
LYGP’s Standalone Credit Profile (SCP) of ‘b’ reflects its heavy reliance on short-term financing and heightened refinancing risk, despite company’s strategic position as one of China’s largest coastal ports and favourable hinterland coverage with an extensive transportation network. We forecast its average five-year net debt/EBITDA at 15.1x under our rating case.
KEY RATING DRIVERS
‘Strong’ State Linkages, ‘Very Strong’ Support Record
We regard LYGP’s status, ownership and control as ‘Strong’. Lianyungang Port Holding Group Ltd, which is indirectly wholly owned by Lianyungang municipality, owns about 90% of LYGP and China Development Fund Co. Ltd. owns the remainder. The government appoints and evaluates LYGP’s management and controls its operational, investing and financial activities. We assess the government support record as ‘Very Strong’. The government provides consistent subsidies in the form of special-funds, interest subsidies, tax incentives and favourable policies and we expect this to continue.
‘Strong’ Social-Political and ‘Very Strong’ Financial Incentives for Support
LYGP is Lianyungang city’s largest GRE by staff number, tax contribution and total registered capital. The company is vital in the regional supply chain, as it connects a range of upstream and downstream industries. There are no other local entities with similar scale and capacity that could substitute LYGP without severe service disruption, meaning its default would damage Lianyungang’s social and political status and stability.
LYGP is also the largest and most frequent lender among Lianyungang’s state-owned enterprises (SOEs). It has close financial and operational ties with the municipal government and its default would impair the ability of other SOEs to borrow and raise borrowing costs for other local GREs and the government. Therefore, we believe the government has a ‘Very Strong’ incentive to support LYGP if, needed.
Strategic Location, Diversified Customers and Cargos – Revenue Risk (Volume): High Midrange
Lianyungang port is one of China’s 11 national-level international hub ports and one of the country’s few ports with a comprehensive sea-railway transportation system. It serves a large hinterland, benefiting from its strategic location adjacent to the Yangtze River Delta and Bohai economic development zones, as well as strong rail and road links.
The port also has a diversified customer base, cargo types and business lines, despite of the dominance of more volatile commodities in its overall throughout mix. It plans to gradually increase cargo types with higher tariffs, such as metallic ore, machinery and chemical products, to improve its margin.
Moderate Tariff Flexibility, Absence of Take-or-Pay Contracts – Revenue risk (Price): Midrange
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LYGP, similar to most Chinese ports, follows the prevailing mixed-pricing mechanism. Less than 10% of LYGP’s revenue is required to follow government-set or guided tariffs and it has flexibility to set the tariffs on the reminder. However, the port’s overall pricing power is constrained by competition from nearby ports and its historical performance shows limited tariff growth. It also has few take-or-pay arrangements or long-term contracts, but we believe this is mitigated by high customer stickiness and stability.
Well-Maintained Facilities, Strategic Growth Programme – Infrastructure Development and Renewal: Midrange
We expect capex to remain elevated over the medium term, reflecting LYGP’s commitment to rapidly develop the port industry and solidify its position. It has an aggressive capex plan to upgrade its facilities and increase capacity to accommodate larger container ships, add more berths and expand network coverage. We expect capex to be funded through internal cash flow, capital-market borrowing and government subsidies. The port has flexibility to defer its expansion plan if needed.
Corporate-Style Borrower, Reliance on Short-Term Debt: Debt Structure: Weaker
LYGP is a typical corporate borrower with mainly bullet and loosely covenanted debt. It is highly reliant on short-term debt, which heightens refinancing risk. China’s recently frozen bond issuance market has left the company leaning on relationship banks to fill its funding gap. However, refinancing risk should be moderated by cash on hand and unused bank facilities. We expect liquidity to improve once the bond market recovers, as LYGP has been a frequent bond issuer in the domestic market and has been able to borrow at reasonable costs.
We see EP BCo S.A. (Euroports, BB-/Stable) as LYGP’s close peer. Euroports’ better debt structure, with no bullet maturities before 2026, and stronger financial profile, as is reflected in a rating-case gross debt/EBITDA of just under 6x, support two notches of difference in Fitch’s credit assessment. Euroports operates in large, mature and economically strong areas through a portfolio of 39 terminals. These are strategically located close to production and consumption centres and benefit from good hinterland and multi-modal connectivity. Cargo is concentrated in the commodity sector. Like LYGP, Euroports has long-standing relationships with a diversified customer base and take-or-pay clauses underpin a small part of revenue. Tariff increases tend to be limited by contractual arrangements and are generally indexed at inflation despite full flexibility.
From GRE perspective, LYGP compares well with Zhejiang Provincial Seaport Investment & Operation Group Co., Ltd. (A+/Stable). Both entities are deemed to have very strong linkages to their respective governments, and the IDRs are consequently equalised to Fitch’s internal assessment of the creditworthiness of the governments. The support record of Zhejiang Seaport is constrained at ‘Strong’, as the company’s robust operational results, which result in no need of support, mean that there is a lack of a sufficient record of support. However, Zhejiang Seaport benefits from greater ownership and socio-political implications of default than LYGP in GRE framework, with a “Very Strong” assessment.
Source: Fitch Ratings