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22/10/2019 17:16

Moody's changes Shenzhen Expressway's outlook to stable

    Moody's Investors Service has changed to stable from positive the outlook on Shenzhen Expressway Company Limited's (SZEC)(00548) Baa2 issuer rating and senior unsecured rating.
  At the same time, Moody's has affirmed all ratings.
  The rating and outlook of SZEC's parent, Shenzhen International Holdings Limited (SZIH, Baa2 stable), are not affected by this rating action. 
  "The change in outlook to stable reflects the company's heightened leverage which is mainly driven by ongoing investments in environmental businesses, as well as higher capex related to its toll road business" said Ivy Poon, a Moody's Vice President and Senior Analyst.
  "The weakening in credit metrics resulting from these investments are beyond Moody's expectation, and no longer support a positive outlook on the ratings," added Poon.
  The company had announced several investments in the past two years, including the recent acquisition of 67% of Baotou Nanfeng Group.
  Moody's expects SZEC will remain acquisitive during 2019-21. Specifically, Moody's expects the company's capex and investments will reach RMB3.5 billion-RMB4.5 billion in 2019, of which RMB1.6 billion is related to capex for the Outer Ring Project, which is one of the major expressway projects in Shenzhen regions.
  Accordingly, Moody's expects the company's adjusted fund from operations (FFO)/debt will weaken to 16%-19% during the forecast period from 20.3% in 2018. In its analysis, Moody's treats the interest-bearing intercompany loans related to presale cash proceeds from the Meilin Checkpoint Renewal Project as debt.
  Moody's expects the company's financial flexibility will be reduced further if it undertakes the Jihe Expressway expansion project on a substantially debt-funded basis. Moody's has not considered the potential capex associated with Jihe Expressway, as SZEC is still in negotiations with the Shenzhen government, with limited clarity around the investment, shareholding structure, and financing arrangement.
  SZEC's Baa2 ratings continue to reflect its dominant position in Shenzhen's toll road network, supported by steady traffic volumes and sound economic fundamentals in its servicing regions. At the same time, the rating is constrained by the company's growing exposure to non-toll road investments, which entails higher business and financial risk. The evolving regulatory regime of the toll road sector also poses a credit challenge.
  The stable outlook reflects Moody's expectation that SZEC will (1) maintain its stable financial profile over the next 12-18 months, and (2) not engage in capital spending and acquisitions that materially weaken its business and financial profiles beyond rating expectation.

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