Fitch Affirms Shenzhen International's 'BBB' Rating; Outlook Stable

Shenzhen International Holdings

22/05/2020 12:38

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-May 22: 

Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Shenzhen 
International Holdings Limited (SZIH) at 'BBB'. The Outlook is Stable. The 
rating has been removed from Rating Watch Negative.

The rating incorporates a one-notch uplift from SZIH's underlying rating of 
'bbb-', reflecting moderate linkages between SZIH and its holding company, 
Shenzhen Investment Holdings Co., Ltd. (SIHC, A+/Stable), as assessed under 
Fitch's Parent and Subsidiary Rating Linkage criteria. 

RATING RATIONALE

SZIH's rating reflects the combined credit profile of its toll-road and 
logistics businesses. The Shenzhen-based company is a medium-sized 
infrastructure company with exposure to toll-road operations via its 
51.56%-owned subsidiary, Shenzhen Expressway Company Limited (SZE, BBB/Stable), 
and development of high-standard logistics facilities across China. The company 
is also a passive, minority investor in Shenzhen Airlines with a 49% stake. The 
toll-road business contributed 48% of SZIH's revenue and 37% of profit in 2019, 
a decline from 73% and 63%, respectively, in 2018, primarily due to the 
contribution of a logistics facility that was converted from a property project 
at the Meilin Checkpoint in Shenzhen. Its non-toll-road businesses including 
logistics and property development are new growth areas, while its toll-road 
operations continue to expand and provide stable cash flows.

The company's toll-road business operated by SZE was hard hit by a slump in 
traffic earlier this year amid the coronavirus outbreak and suffered a huge 
revenue drop due to toll exemptions imposed by the Chinese government from 17 
February to 5 May in a bid to quickly reopen businesses. However, traffic has 
rebounded strongly even after the end of the toll holiday. Aggregate traffic on 
its controlled roads rose by a low single digit yoy from 6-18 May. Fitch 
believes the resilience of its road assets is driven by their robust 
characteristics including strategic locations in Guangdong province where 
businesses and lives have returned quickly to normal and their traffic 
composition with large numbers of commuters. 

Fitch expects lingering public health concerns to continue to contribute to an 
increase in road traffic as travelers will prefer to commute or travel by car 
and maintain social distancing at least until a vaccine is available. The risks 
of a reimposition of travel restrictions remain due to the possibility of a 
second wave of the outbreak. However, Fitch believes any restrictions will be on 
a much smaller scale and of a shorter duration, which would limit the impact.

SZIH's logistics business was also affected by the pandemic although to a lesser 
extent. It lost two months of rental income from its logistics centres and hubs 
because it waived the rental for its tenants to provide relief. The logistics 
facilities have resumed their normal operations with the gradual stabilisation 
of the economy and the company retained all its major tenants during the 
pandemic. 

The Stable Outlook reflects Fitch's view that the company will benefit from the 
stabilisation of the macroeconomic environment in the medium term. The risk of 
another wave of the coronavirus before a vaccine is developed remains, but Fitch 
believes it may be more manageable. We also expect the company to be able to 
absorb the potential shock in light of its business diversity and ample 
financial headroom as it has robust liquidity and flexibility to delay capex.

KEY RATING DRIVERS

Strategic, Robust Expressway Network - Revenue Risk (Volume): Midrange

The 'Midrange' volume risk is a reflection of the company's robust expressway 
portfolio, which is counterbalanced by the logistics business's higher risks. 
The majority of its core expressway assets are strategically spread across the 
wealthy Guangdong province, including Shenzhen city, while three are in central 
China. The operating portfolio mainly includes key arterial roads with a large 
commuter base and limited competition. 

Its traffic remained robust during the coronavirus outbreak, recovering to last 
year's level within a short period despite the macroeconomic weakness of the 
last few months. Toll rates on the network are generally low due to 
restrictions, and the reductions that are sometimes imposed by the government. 
Fitch's latest economic outlook forecasts China's quarterly GDP will grow 
gradually by 0.2%, 3.2% and 5.1% in 2Q20, 3Q20 and 4Q20, respectively, picking 
up to 7.6% in 2021. Fitch believes this will help traffic on SZE's roads rise 
steadily from 2H20.

The logistics business has inherently higher execution risks than the toll-road 
business and the company's increasing efforts to expand the logistics segment 
limit the overall volume risk to 'Midrange'.

Opaque Regulatory Framework - Revenue Risk (Price): Weaker

A lack of transparency and predictability in the regulatory framework result in 
a 'Weaker' price risk assessment. 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 for any potential 
increase. Instead, the government has imposed a number of tariff cuts and toll 
exemptions, resulting in a decline in the overall average toll rate. 

The recent imposition of toll suspension during the lockdown amid the 
coronavirus outbreak was another example of heavy government interference in the 
operation of toll roads. That said, we believe the regulatory environment of the 
sector has stabilised and the transport authority at each provincial level will 
shortly provide some relief to the operators for their losses, mostly likely in 
a form of a concession life extension. SZE has also been able to recoup its 
losses from the local authority as a result of these policies in many cases; for 
instance, the Shenzhen authority compensated SZE around CNY300 million for a 50% 
discount on goods vehicle tolls at the Coastal Expressway for March 2018 to 
December 2020. 

Large-Scale, Debt-Funded Capex Plan - Infrastructure Development and Renewal: 
Midrange

We forecast capex in the next five years will be substantial, comprising 
investment in logistics hubs, two greenfield projects, which are Phase II of the 
Coastal Project and the Outer Ring Project, the expansion of the minority-owned 
Yangmao Expressway, development expenditure for the Meilin Checkpoint Urban 
Renewal Project (MCUR), and maintenance capex for operating assets. The risk 
though is controllable because the capex plan is highly developed and detailed. 
We believe SZE has long-standing experience and expertise in delivering on the 
investment of its expressway network while SZIH has extensive experience in 
building logistics parks and hubs. Nevertheless, the uncertainties over the 
timing and the costs in land acquisition for the logistics hubs constrain this 
risk factor to 'Midrange'.

Non-Amortising Uncovenanted Debt - Debt Structure: Midrange

SZIH is a typical corporate borrower whose borrowings are predominantly not 
amortising with few of the protective covenants that are commonly seen in a 
project finance-type structure. Refinancing risk is mitigated by the company's 
ample liquidity comprising cash and a substantial standby bank facility, a 
well-diversified schedule of bullet maturities, record of prudent debt 
management and solid access to the capital market. 

More than half of the debt is borrowed at floating interest rates with the 
majority indexed to the country's benchmark lending rate. Interest rate exposure 
to the country's benchmark lending rate is manageable because the rate has been 
unchanged since 2015 and we do not expect it to rise in the near term. 
Nevertheless, our rating case has taken the risk into account by adding a stress 
of 200bp on the existing rate.

The foreign-exchange risk of its USD300 million bond arising from exposure to 
dollar-yuan fluctuation is hedged through currency swaps and forwards. Another 
USD300 million senior perpetual bond is unhedged, which exposes the company to 
currency risk but we believe this is not substantial.

Financial Profile 

Fitch forecasts SZIH's consolidated net leverage will peak in 2020 due to the 
shock caused by the coronavirus pandemic. The Fitch base and rating cases 
forecast net leverage of 4.4x and 5.4x in 2020, respectively, followed by 
gradual deleveraging from 2021. Average net leverage between 2021 and 2024 will 
be 3.1x and 4.3x under Fitch's base and rating cases, respectively. The base 
case predicts a five-year average of 3.3x while the rating case has a five-year 
average of 4.5x.

PEER GROUP

SZIH's closest peer is Yuexiu Transport Infrastructure Limited (YXT, BBB-/Rating 
Watch Negative) as the toll-road business remains SZIH's major earnings and cash 
flow contributor. SZIH has a larger portfolio than YXT, with key assets 
strategically located in a well-developed region that has limited competition, 
while YXT has better geographical diversity and a longer remaining concession 
life. YXT's infrastructure development and renewal factor is assessed as 
'Stronger' because of its small scale and low complexity while SZIH's is limited 
to 'Midrange' because of its substantial investment plan for its logistics 
business. SZIH has a better projected financial profile, which has balanced its 
weaknesses compared with YXT, resulting in the same underlying rating as YXT's 
IDR.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating 
action/upgrade: 

- Strengthening of linkages between SZIH and SIHC provided the standalone credit 
profile of SZIH stays intact

Factors that could, individually or collectively, lead to negative rating 
action/downgrade:

- A sustained increase in projected net debt/EBITDA leverage to greater than 
4.5x in the Fitch rating case provided the linkages between SZIH and SIHC remain 
unchanged

- Weakening of linkages between SZIH and SIHC

Best/Worst Case Rating Scenario

International scale credit ratings of Public Finance 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 'AAA' to 'D'. Best- and 
worst-case scenario credit ratings are based on historical performance. For more 
information about the methodology used to determine sector-specific best- and 
worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

CREDIT UPDATE

SZIH's revenue surged 45% and profit attributable to shareholders gained 19% in 
2019. Its core subsidiary, SZE, also delivered solid performance as revenue rose 
6.5% and profit attributable to shareholders, excluding non-recurring items, 
increased 45.9% from a year earlier. Revenue at SZIH's logistics segment rose 
18%, driven by the addition of 400,000 sq m to operations and a higher occupancy 
rate of 85%. 

SZIH has started the pre-sale of MCUR, its majority-owned property-development 
project in Shenzhen. The total value of the project is estimated at HKD15 
billion. The first phase, comprising residential estates with a total gross 
floor area (GFA) of 75,000 sq m, has been sold out and delivered, contributing 
significant revenue of HKD4.5 billion in 2019. The second phase, with a GFA of 
68,000 sq m, started pre-sales at the end of 2019 and the company expects to 
deliver and recognise the sales as revenue by this year. The third phase, 
comprising a residential portion with GFA of 63,000 sq m and offices and 
commercial property with a GFA of 190,000 sq m, is under development and may 
start pre-sales in 2021.

Its consolidated net leverage declined from 2.1x to 1.9x in 2019, reflecting 
healthier financial leverage. Its combined liquidity stayed robust, comprising 
readily available cash and standby bank facilities with a total amount of 
HKD71.4 billion as of 31 December 2019.

FINANCIAL ANALYSIS

The Fitch base case takes into account two-month rental exemptions at its 
logistics facilities by reducing the revenue by 17% in 2020. Fitch's base case 
assumes a 15% drop in port revenue as a result of the pandemic in 2020. Fitch's 
base case projects a 5% revenue increase for both the logistics business as well 
as the ports starting 2021. Fitch's base case also projects its logistics hubs 
will raise their operating area by 400,000 sq m every year. Fitch also considers 
the cash flow realised gradually through selling the residential estates at MCUR 
over the next four years. The EBITDA margin of the businesses will average 
around 41% between 2020 and 2024. 

Fitch's base case assumes a revenue slump of 40% in 2020 for its non-controlling 
asset, Shenzhen Airlines, with a recovery to pre-crisis levels in 2022. We have 
factored in a 5% increase for 2023 and 2024. The Fitch base case also takes into 
account the operational commencement of the Outer Ring Project at the beginning 
of 2021. Under the base case, the projected five-year average leverage ratio is 
3.3x.

The Fitch rating case takes a more conservative stand and incorporates a number 
of stresses, mainly slower revenue growth of 3% in logistics services and ports 
and income from non-controlling assets, a 5% haircut to toll revenue each year, 
a deeper revenue fall of 60% for Shenzhen Airlines in 2020 and more time for it 
to recover to pre-crisis levels in 2023, a narrower average EBITDA margin of 
about 3 percentage points in 2019-2024, a 200bp increase in the floating 
interest rate, a 10% increase in capex, and a 5 percentage-point increase in the 
dividend payout ratio. The rating case results in a higher average net 
debt/EBITDA of 4.5x.

Asset Description 

SZIH is a company incorporated in Bermuda and is listed on the main board of the 
Stock Exchange of Hong Kong. The company, together with its subsidiaries and 
associates, is principally engaged in the investment, construction and operation 
of logistics infrastructure facilities, third-party logistics services, 
logistics information services, and toll-road businesses. SIHC, the controlling 
shareholder of the company, is a corporation wholly owned by the State-owned 
Assets Supervision and Administration Commission of the People's Government of 
Shenzhen Municipal and, as of 31 December 2019, held approximately 44.04% of the 
issued share capital of the company.

SZIH operated three well-equipped logistic parks in Shenzhen and deployed China 
Urban Integrated Logistics Hubs across 26 major logistic-gateway cities with 17 
operational projects as of end-2019. The total planned and acquired site areas 
were 7.28 million sq m and 4.87 million sq m, respectively, while the operating 
area was 2.01 million sq m. SZIH's toll-road network comprises 17 highway 
projects with a focus in the Shenzhen metropolitan area. The total network is 
approximately 550 km, of which 65.7 km is still under construction. The average 
concession life is 10 years.

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

SZIH's rating benefits from a one-notch uplift for potential support from its 
parent, SIHC, as assessed under the Parent and Subsidiary Rating Linkage 
criteria.

ESG Considerations

The highest level of ESG credit relevance, if present, is a score of 3. This 
means ESG issues are credit-neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or to the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Shenzhen International Holdings Limited; Long Term Issuer Default Rating; 
Affirmed; BBB; RO:Sta

Contacts: 

Primary Rating Analyst

Sunny Huang, CPA

Director

+852 2263 9979

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Louis Pang, FRM

Associate Director

+852 2263 9992

Committee Chairperson

Sajal Kishore, 

Senior Director

+65 6796 7095

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Infrastructure and Project Finance Rating Criteria (pub. 24 Mar 2020) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10114533

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) 

https://www.fitchratings.com/site/re/10089196

Toll Roads, Bridges and Tunnels Rating Criteria (pub. 24 Mar 2020) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10114695

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/973270

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10123164

Solicitation Status 

https://www.fitchratings.com/site/pr/10123164#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10123164#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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