Fitch Ratings has affirmed China-based AVIC International Holding Corporation's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook.
The company's senior unsecured rating and the rating on 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 and one notch down from Fitch's internal assessment of its parent, Aviation Industry Corporation of China, Ltd. (AVIC), under a 'strong parent, weak subsidiary' approach. We assess that AVIC has 'High' operational and 'Medium' strategic incentives to support AVIC International, while the legal incentive is 'Weak'. AVIC International is 91.14%-owned by AVIC and is responsible for the majority of AVIC's aviation-related import and export business.
AVIC's credit profile reflects potential support from the Chinese government (A+/Stable) under Fitch's Government-Related Entities (GRE) Rating Criteria. We expect 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, as it 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.
'High' Operational Incentive to Support: We believe AVIC has a 'High' operational incentive to support AVIC International in light of the extensive operational synergies between the two, as well as strong management overlap. AVIC International is responsible for more than 80% of AVIC's aviation-related import and export business, and acts as an important link between the global aviation industry and China, where AVIC plays an important role in the domestic aviation market.
In addition, AVIC International is positioned as the exclusive integrated aviation supply-chain platform within AVIC, and we expect synergies between AVIC International and other AVIC group subsidiaries to strengthen. AVIC also has absolute management control over AVIC International and the group has highly centralised treasury management through AVIC Finance Co., Ltd., a licensed finance company.
'Medium' Strategic Incentive to Support: Fitch believes AVIC has a 'Medium' strategic incentive to support AVIC International. The assessment is based on AVIC International's meaningful financial contribution to the group, but is constrained by its limited participation in the parent's core aviation manufacturing business. AVIC International accounted for 35% and 28% of the parent's revenue and EBITDA, respectively, in 2021, and is AVIC's largest revenue contributor and top dividend contributor among its major subsidiaries.
'Low' Legal Incentive to Support: We assess that AVIC has a 'Low' legal incentive to provide support to AVIC International, as the parent does not guarantee the subsidiary's debt given the latter's proven financing capability. Debt with cross-default clauses covering AVIC International is also insignificant.
Diversified Business: AVIC International's business consists of the core aviation business, advanced manufacturing, international infrastructure, and modern services and trading. Its diversified business has helped it weather China's economic slowdown. AVIC International's advanced manufacturing business comprises mainly electronics, including making liquid crystal displays and printed circuit boards, which have high growth potential amid the use of 5G technology.
Moderately High leverage; Financial Flexibility: We assess AVIC International's Standalone Credit Profile (SCP) at 'bb-', which reflects its diversified businesses as well as its leadership in aviation importing and exporting and niche electronics markets. It enjoys easy funding access with low financing costs, supported by strong EBITDA interest coverage of 4x-5x (2021: 5.3x). The SCP is constrained by moderately high leverage; we expect net debt/EBITDA to remain at 5.0x-5.5x (2021: 5.2x) over the next few years, underpinned by stable profitability and controlled capex.
Derivation Summary
We rate AVIC International on a top-down basis from its parent, AVIC, under our Parent and Subsidiary Linkage Rating Criteria. The strong linkage between AVIC International and AVIC is supported by the subsidiary's position as an integral part of its parent's aviation manufacturing, as it undertakes the majority of the parent's aviation-related imports and exports. It is also transitioning to provide integrated supply-chain services for the parent and its subsidiaries.
This linkage is similar to that of peers rated one notch below their parents, such as Baosteel Resources International Company Limited (A-/Positive), which carries a similar role of importing key raw materials for its parent and is highly integrated into its parent's operation.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Annual revenue growth at 4.5%-6.0% during 2022-2024;
Operating EBITDA margin maintained at 8.0%-8.5% during 2022-2024;
Capex of 4.5%-6.0% of revenue (2021: 5.5%), or CNY9.2 billion-11.6 billion a year, during 2022-2024.
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 its ratings action commentary of 2 June 2022:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Structural Features: A continued rise in macro-financial risks, for example through failure to maintain credit growth at a level close to nominal GDP growth over the next few years.
Public Finances: A sharp upward trend in government debt/GDP or a crystallisation of contingent liabilities that leads to a significant rise in government debt relative to 'A' peers.
External Finances: Sustained capital outflows sufficient to erode China's external balance-sheet strengths relative to 'A' peers, which would cause the removal of the +1 Qualitative Overlay (QO) notch on External Finances.
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 QO notch on Structural Features.
External Finances: Widespread adoption of the Chinese yuan as a 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 CNY30.2 billion in unrestricted cash at end-2021 and CNY184.4 billion in unused bank facilities, sufficient to cover short-term debt of CNY31.6 billion.
Issuer Profile
AVIC International undertakes more than 80% of AVIC's aviation-related import and export business, and is the exclusive integrated aviation supply-chain platform within AVIC. AVIC International also operates a large portion of AVIC's non-aviation businesses, excluding the financial segment that falls 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
AVIC INDUSTRY-FINANCE HOLDINGS CO., LTD. 
