Fitch Ratings-Hong Kong-May 30: Fitch Ratings has assigned Beijing Future Science Park Development Group Co., Ltd. (BFSP) Long-Term Foreign- and Local-Currency Issuer Default Ratings of 'BBB'. The Outlook is Stable.
BFSP ratings are assessed under Fitch's Government-Related Entities (GRE) Rating Criteria, reflecting the entity's control and ownership by the Changping district government in Beijing, the government's support track record and expectation, as well as the socio-political and financial impact on the government from a default by BFSP.
BFSP was established in August 2009 and is majority-owned by the Changping district government via the Changping State-owned Assets Supervision and Administration Commission (Changping SASAC). BFSP is the major urban developer for the Beijing Future Science Park, which aims to be a leading innovation hub in China that attracts top national and international talent to participate in scientific research and technology innovation.
KEY RATING DRIVERS
'Very Strong' Status, Ownership and Control: BFSP is 76.79% owned by the Changping SASAC in Beijing as of May 2019 and is registered as a limited liability company under China's Company Law. The minority shares are held by other GREs, although the government may repurchase the shares in the future. The district government appoints most of the board members and senior management of BFSP, and closely monitors its financing plan and debt. The government sets audit criteria and assesses BFSP's annual performance.
'Strong' Support Track Record and Expectations: Beijing Future Science Park is part of a key national strategy to facilitate scientific research and innovation. BFSP receives solid government support from the Beijing municipal government and the Changping district government. Government support of all forms, including capital injections, project funds, financial subsidies and land cost returns, totalled CNY38.5 billion from 2009 to 2018. Half of the amount was from land cost return, followed by project funds and capital injections. We expect legitimate support to BFSP to continue in the medium term.
'Moderate' Socio-Political Implications of Default: BFSP is the major urban developer for the Beijing Future Science Park and it carries out government duties, including primary land development, infrastructure development, property development and provision of resettlement housing. Many well-known GREs are based at the park. The company's failure could jeopardise the park's policy duties and services, although BFSP may be substituted by competing GREs from outside the park.
'Very Strong' Financial Implications of Default: BFSP is the largest GRE within Changping district and it raises funds for urban development projects in the Beijing Future Science Park. BFSP's total assets in 2017 accounted for 56% of Changping district's gross regional product. A failure by the government to provide timely support, leading to a default by BFSP, could imply the government is in financial difficulty, which would then impair the government's credibility as well as other GREs' ability to secure financing.
'b' Category Standalone Credit Profile: BFSP has large capex, high leverage and limited cash flow debt servicing ability. Capital-intensive public-work investments and its weak cash generation weighed on its leverage, leading to high net debt to Fitch-calculated EBITDA (excluding quasi debt) of 15.4x in 2017 with cash flow from operations to debt and interest coverage consistently below 1x. Net debt to Fitch-calculated EBITDA is likely to remain above 20x under the rating case in foreseeable future due to its capex plan. Nevertheless, the stable contractual framework plus the local government's consistent financial support will mitigate the risk.
'Weaker' Revenue Defensibility: The majority of BFSP's operating revenue is related to primary land development. The revenue BFSP receives from primary land development depends on the amount of land sold by the government, which is in turn affected by government's sentiment on land sales and budget. The number of potential tenants at the park, which is affected by the overall economy, synergies and supply value-chain support they can get and competition from neighbouring parks, will also affect the government's land strategy. Nevertheless, we assess the risk that BFSP will not receive any revenue from primary land development as low because it is strategically important to the park and the government is likely to provide revenue support, if needed.
BFSP's pricing for its leasing and services businesses within Beijing Future Science Park could be affected by prices offered by competing industrial parks nearby, the state's overall industry development strategy, local government policies and the bargaining power of tenants in the park. To increase attractiveness and competitiveness, BFSP could offer incentives to leading market players in industries preferred by the municipal government.
'Mid-Range' Operating Risk: The majority of BFSP's costs are construction costs and maintenance costs for its existing facilities. The construction industry is a fully competitive sector in China and Fitch believes BFSP has sufficient bargaining power to manage the potential volatility in costs. In addition, there is an adequate supply of construction companies and labour with limited volatility.
RATING SENSITIVITIES
The ratings could change if Fitch revises its perception of the Changping district government's ability to provide subsidies, grants or other legitimate resources allowed under China's policies and regulations. Greater incentive for the government to provide support, including stronger socio-political and financial implications of a default by BFSP and a stronger track record of support, may trigger positive rating action.
A downgrade may arise from significant weakening in the socio-political and financial implications of a default, a weaker track record of support by the government, or dilution of the government's stake. Improvement or deterioration of the standalone credit profile or the liquidity position of BFSP would also affect the ratings.
Contact:
Primary Analyst
Janet Liu
Associate Director
+852 2263 9983
Fitch (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central, Hong Kong
Secondary Analyst
Kelvin Tsui
Senior Director
+852 2263 9965
Committee Chairperson
Vladimir Redkin
Senior Director
+7 495 956 2405
Media Relations: Yee Man 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
Applicable Criteria
Government-Related Entities Rating Criteria (pub. 29 Mar 2019)
Rating Criteria for International Local and Regional Governments (pub. 09 Apr 2019)
Rating Criteria for Public-Sector, Revenue-Supported Debt -- Effective Feb. 26, 2018 to May 27, 2019 (pub. 26 Feb 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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