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    600705   CNE000000KC1

AVIC INDUSTRY-FINANCE HOLDINGS CO., LTD.

(600705)
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AVIC Industry Finance : Fitch Affirms AVIC International at 'A-'; Outlook Stable

07/21/2021 | 07:43am EDT

Fitch Ratings has affirmed China-based AVIC International Holding Corporation's (AVIC International) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-' with a Stable Outlook.

The company's senior unsecured rating and the outstanding senior unsecured notes issued by AVIC International Finance & Investment Limited and AVIC International Finance Limited have also been affirmed at 'A-'.

AVIC International is rated on a top-down basis from Fitch's internal assessment of its parent, Aviation Industry Corporation of China, Ltd. (AVIC), based on the agency's Parent and Subsidiary Linkage Rating Criteria under a 'strong parent, weak subsidiary' approach. We assess that AVIC International and its parent, AVIC, maintain strong operational and strategic ties, though legal ties are weak. AVIC International, 91.14%-owned by AVIC, is responsible for the majority of AVIC's aviation-related import and export business.

AVIC's credit profile reflects the potential support from the Chinese central government under the agency's Government-Related Entities (GRE) Rating Criteria. We expect the governmental support to flow down to AVIC International.

KEY RATING DRIVERS

Parent Pivotal to National Defence: AVIC, originally a state-owned aircraft manufacturer, is of high strategic importance to China's national defence and acts as the backbone of the country's military and civilian aviation manufacturing industry. It has a monopoly in military aircraft manufacturing and maintenance, and is one of two Chinese manufacturers of civilian aircraft. The other manufacturer is Commercial Aircraft Corporation of China, Ltd, in which AVIC is the third-largest shareholder.

Strong Linkage with AVIC: AVIC International is a core unit of the parent. We assess the strategic ties between the two as strong. The subsidiary is responsible for more than 80% of AVIC's aviation-related import and export business, acting as an important link between the global aviation industry and China, where AVIC has a major role in the domestic aviation market. Meanwhile, AVIC International has been positioned as the exclusive designated integrated-aviation supply chain platform within AVIC since 2018. AVIC International is AVIC's top revenue and dividend contributor among its major subsidiaries.

Strong operational ties are evident from AVIC's absolute management control over AVIC International and the highly centralised treasury management through AVIC Finance Co., Ltd., a licenced finance company. Fitch also expects the synergy between AVIC International and other AVIC group subsidiaries to strengthen, with AVIC International's undertaking the role as the group's exclusive aviation supply-chain integrated service platform.

Diversified Business: AVIC International's business now consists of four subsectors after it exited some non-core businesses in the past three years - its core aviation business, advanced manufacturing, international infrastructure, and modern services and trading.

Its diversified business scope enabled it to weather the economic downturn with a slight revenue drop of 4% in 2020, despite Covid-19's severe hit on the aviation industry. AVIC's advanced manufacturing business comprises mainly electronics, including the manufacture of liquid crystal displays and printed circuit boards, which have high growth potential amid the use of 5G technology.

Large Capex; High Leverage: Fitch assesses AVIC International's standalone credit profile (SCP) at 'b-' as it is constrained by high leverage and sustained negative free cash flow. We expect its funds from operations net leverage to remain at around 7x in the medium term, due mainly to high capex of over CNY14 billion a year to remain competitive in the electronics business. However, the SCP is supported by AVIC's diversified business scope, leadership in aviation importing and exporting business and in niche electronics markets, and sufficient liquidity buffer due to its state-owned status.

DERIVATION SUMMARY

AVIC International is rated on a top-down basis from its parent, AVIC, as per Fitch's Parent and Subsidiary Rating Linkage Criteria. The strong linkage between AVIC International and AVIC is supported by the subsidiary's role as its parent's strategic platform to globalise China's aviation business and diversify into other sectors.

Fitch's internal assessment of AVIC's credit profile is based on Fitch's GRE criteria. AVIC is the main producer of military aircraft and other aviation products in China.

The linkage between the two entities is similar to that of peers rated two notches below their parents, such as Sichuan Road & Bridge (Group) Corporation Ltd. (BBB/Stable), which is the main construction arm of parent Sichuan Railway Investment Group Co., Ltd.'s (A-/Stable) motorway and railway projects.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer :

Revenue growth to recover to 4% in 2021 due to robust performance from the electronics segment and trading business, and then slow to 1% starting 2022, with the company gradually exiting its non-core businesses;

Operating EBITDA margin to improve to 9%-9.5% during 2021-2023, with a larger contribution from the profitable electronics segment;

Capex to remain at 8%-8.5% of revenue, or CNY13.5 billion-14.3 billion per year, during 2021-2023 (2020: 8.6%).

RATING SENSITIVITIES

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

Positive rating action on the Chinese sovereign;

Strengthening linkages between AVIC International and AVIC.

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

Negative rating action on the Chinese sovereign;

Weakening linkages between AVIC International and AVIC.

Weakening likelihood of support from the Chinese sovereign to AVIC.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in our rating action commentary of 28 June 2021:

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

Structural features: A further rise in macro-financial risks, for example through failure to maintain credit growth close to or below nominal GDP growth over the next few years.

Public finances: A sustained upward trend in government debt/GDP, or a crystallisation of contingent liabilities that leads to a sharp rise in government debt relative to 'A' peers.

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

Structural features: A material reduction in macro-financial risks and associated contingent liabilities facing the sovereign, for example, by maintaining credit growth below nominal GDP growth over a multi-year period, which would cause the removal of the -1 qualitative overlay notch on structural features.

External finances: Evidence of widespread adoption of the Chinese yuan as a global reserve currency, as reflected in a substantial increase in the share of yuan-denominated claims in the IMF's currency composition of official foreign-exchange reserves (COFER) database.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate 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 four 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.

LIQUIDITY AND DEBT STRUCTURE

Smooth Funding Access: Liquidity is not an issue for AVIC International due to its close relationships with Chinese banks, access to the onshore and offshore bond markets and onshore equity markets, and support from AVIC's group centralised treasury management. AVIC International had a cash balance of CNY28 billion, on a consolidated basis, at end-2020 and unused credit facilities of CNY207 billion. This was sufficient to repay and refinance its short-term debt of CNY26 billion.

ISSUER PROFILE

AVIC International is a key platform of AVIC's international aviation business as it undertakes more than 80% of the parent's importing and exporting business. AVIC International also operates a large portion of AVIC's non-aviation businesses, excluding the financial segment, which is under AVIC Industry-Finance Holdings Co., Ltd. (A-/Stable).

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.

ESG CONSIDERATIONS

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

RATING ACTIONSENTITY/DEBT	RATING		PRIOR

AVIC International Finance Limited

senior unsecured

	LT	A- 	Affirmed		A-
AVIC International Holding Corporation	LT IDR	A- 	Affirmed		A-
	LC LT IDR	A- 	Affirmed		A-

senior unsecured

LT	A- 	Affirmed		A-

AVIC International Finance & Investment Limited

senior unsecured

LT	A- 	Affirmed		A-

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2021 Electronic News Publishing, source ENP Newswire

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Financials
Sales 2021 19 645 M 3 077 M 3 077 M
Net income 2021 3 631 M 569 M 569 M
Net Debt 2021 - - -
P/E ratio 2021 9,41x
Yield 2021 2,89%
Capitalization 33 645 M 5 270 M 5 270 M
Capi. / Sales 2021 1,71x
Capi. / Sales 2022 1,58x
Nbr of Employees 4 885
Free-Float 47,7%
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Number of Analysts 2
Last Close Price 3,81 CNY
Average target price 5,00 CNY
Spread / Average Target 31,1%
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Managers and Directors
Jiang Tao Yao Chairman, General Manager & Secretary
Chuang Jie Hu Chairman-Supervisory Board
Xing Min Yin Independent Director
Qi Xiang Sun Independent Director
Jian Xin Wang Independent Director