Shenzhen Expressway Co. Ltd. #BBB# And #cnA# Ratings Outlook Stable

Stocks and Financial Services Press Releases Thursday June 29, 2017 17:08
HONG KONG--29 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 29, 2017--S&P Global Ratings affirmed its 'BBB' long-term corporate credit rating on Shenzhen Expressway Co. Ltd. The outlook is stable. At the same time, we affirmed our 'cnA' long-term Greater China regional scale rating on the company. Shenzhen Expressway is primarily involved in toll-road investment, construction, and operations in Shenzhen and Guangdong province, China.

We affirmed the rating because we expect Shenzhen Expressway's cash flows from toll roads to remain robust and stable over the next 12-24 months. The company's accumulated sizable cash balance over the previous two years will enable it to absorb the impact of recent acquisitions. We therefore expect Shenzhen Expressway to maintain its current leverage range of a ratio of funds from operations (FFO) to debt of 35%-40% over the next two years.

We expect Shenzhen Expressway's revenue from toll roads to grow materially by 20% in 2017. Our view is supported by the organic growth of the expressway portfolio and the contribution from Yichang Expressway, owing to the strategic location of its toll roads and continued economic growth in the catchment area. We expect the toll-road segment to grow at 4%–6% 2018 onward, in line with the local area's GDP growth. In January 2017, Shenzhen Expressway acquired Yichang Expressway in the Hunan province for Chinese renminbi (RMB) 1.27 billion. This replenished its toll road portfolio after a total of 90 kilometers (km) of roads in Shenzhen that the local government has already bought or intends to buy back. In addition, the company will spend a total of RMB6.5 billion on the Shenzhen Outer Ring project under the public-private partnership model (as the private party) for the 25-year operating rights. This project is currently under construction and targets to become operational in 2020.

In our view, Shenzhen Expressway's RMB4.4 billion acquisition of a 20% stake in Chongqing Derun Environment Co. Ltd. in May 2017 marks the company's strategic shift to diversify into the environmental services business. Derun is a holding company with controlling interests in water drainage and solid waste incineration in the Chongqing municipality. Although Shenzhen Expressway financed the acquisition with its cash holdings with limited pressure on its leverage, this asset provides limited financial returns. We expect Derun to contribute less than 5% of Shenzhen Expressway's EBITDA in the next two to three years, and the company expects to play a limited role in Derun's operations and management. Therefore we assess that Derun will have a limited effect on Shenzhen Expressway's overall business profile.

We continue to believe Shenzhen Expressway will remain exposed to the risk of government-initiated expressway-related transactions in the next 24 months. For example, the Shenzhen government may make further changes to urban road planning, which may affect the company's toll road portfolio. Government policies therefore continue to constrain the company's business risk profile. In addition, we believe Shenzhen Expressway may further explore other non-toll road businesses, including water planning and other environmental services if attractive toll road acquisition opportunities are limited. This uncertainty in the company's acquisition strategy may continue to constrain any rating upside.

The stable outlook reflects the organic growth of Shenzhen Expressway's toll road portfolio, growing contribution from new assets, and phased capex on the Outer Ring project over the next 24 months. It also reflects our stable

outlook on Shenzhen Expressway's parent, Shenzhen International Holdings Ltd. (BBB/Stable/--; cnA/--), and our unchanged view of Shenzhen Expressway as a core subsidiary of the parent.
We could lower the rating on Shenzhen Expressway if we downgrade Shenzhen International or we lower our assessment of Shenzhen Expressway's 'bbb' stand-alone credit profile (SACP).
We could lower the SACP if Shenzhen Expressway's:

FFO interest coverage weakens to below 4x for a sustained period;FFO-to-debt ratio deteriorates to below 23% for a sustained period; orThe company expands into other non-toll road businesses, which significantly weaken its business and financial profiles.

We would upgrade Shenzhen Expressway if we raise the rating on the parent. Positive rating momentum could also occur if we see continued organic growth in the company's toll-road portfolio, measured debt-funded capex and new investments, and limited exposure to non-toll road assets.

An upgrade hinges on a commitment to financial policies to sustain the FFO interest coverage above 8x and the ratio of FFOto debt above 35%.

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