Fitch Ratings has affirmed Beijing Energy International Holding Co., Ltd. (BEIH) Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'A' with a Stable Outlook.

Fitch has also affirmed the company's senior unsecured rating of 'A'.

BEIH is rated one notch down from its 32% parent, Beijing Energy Holding Co., Ltd. (BEH, A+/Stable), based on a strong parent, weak subsidiary approach under Fitch's Parent and Subsidiary Linkage Rating Criteria. We assess BEH has 'Medium' legal, strategic and operational incentives to support BEIH, which acts as a strategically important renewable-energy investment platform of BEH.

Key Rating Drivers

'Medium' Legal Incentive to Support: BEH guaranteed about 33% of BEIH's debt issued by offshore and onshore holding companies at end-2022 (end-2021: 35%). We regard the guarantees' coverage and permanence to be 'Medium', as BEIH may increase external borrowings without parental support as its asset base expands rapidly. Our factor assessment also reflects the large internal loans BEH provided to BEIH's project and onshore holding companies. About 30% of BEIH's borrowings were extended at end-2022 by BEH and its related entities, which also guaranteed some of BEIH's external bank borrowings.

'Medium' Strategic Incentive to Support: BEIH's 'Medium' competitive advantage to its parent is supported by its role in implementing BEH's overall energy-transition strategy and BEH's mandate in improving Beijing's energy structure. Fitch estimates that BEIH will account for about 65% of BEH's renewable-energy installations during 2021-2025. BEIH also has a leading role in investing in large renewable-energy base projects in Inner Mongolia and Jilin province, for power that would be transmitted to the capital city.

Our assessment of the growth potential subfactor is 'High' due to BEIH's rapid expansion. However, we believe BEIH makes a 'Low' financial contribution to BEH as its asset scale still remains small at this juncture.

'Medium' Operational Incentive to Support: Our assessment is underpinned by 'Medium' management and brand overlap, with a low weight assigned to 'Low' synergies from daily operations. BEH assigns BEIH's key management, including the chairman, secretary of the Discipline Inspection Commission, deputy party secretary, CEO and CFO. In addition, BEIH's board is controlled by the parent, and some board directors also perform senior managerial roles at the parent. The two entities share the same branding.

Renewable Focus Supports Business Profile: BEIH is a pure renewable power-generation company. It has no exposure to fuel-cost fluctuations and high dispatch priority, which leads to better cash flow predictability than for thermal power. Market trading in renewables, which have higher price risk relative to projects with fixed feed-in tariffs, has also increased. We believe the overall price risk is still manageable and could be mitigated by lower equipment costs and potential additional income from the green power market.

High Utilisation Hours: The company's suitable project locations and superior wind and solar resources support BEIH's higher utilisation hours than the national average. Fitch expects utilisation hours to remain high at BEIH as it continues to develop projects at favourable locations. Many of its new projects will serve the Beijing-Tianjin-Hebei greater area, where demand is solid.

Leverage to Stay Elevated: BEIH targets to more than triple its renewable installation capacity to 22 gigawatts (GW) by end-2025, from 6.8GW at end-June 2023. Fitch expects BEIH's EBITDA net leverage to stay elevated at above 10x during 2023-2026 (last 12 months to June 2023: 12.7x) on debt-funded capex and continued negative free cash flow during its high growth phase.

Continued funding support from the parent and adequate interest coverage could mitigate the high leverage pressure. BEIH's onshore funding costs are still fairly competitive, supported by a favourable financing environment for renewable projects and BEIH's close linkage with BEH. These conditions have also allowed BEIH to expand its funding channels, as evident from its successful launch of panda bonds and an asset-backed securities programme amounting to about CNY6 billion in 11M23.

Derivation Summary

BEIH is rated one notch below its parent, BEH, due to 'Medium' legal, strategic and operational incentives for parental support under Fitch's Parent and Subsidiary Linkage Rating Criteria.

Key Assumptions

Installed capacity to reach 28GW by end-2026.

Stable capacity utilisation for existing capacity; we assume new projects will have higher utilisation hours than the national average to reflect their locations in better solar- and wind-power resource areas.

Tariff for wind and solar power trending down on the removal of subsidies and some price discounts from market trading.

Cash capex, excluding value-added tax (VAT), of CNY15 billion in 2023 and averaging CNY25 billion per annum in 2024-2026.

RATING SENSITIVITIES

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

Strengthening incentive for BEH to support BEIH

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

Negative rating action on BEH

Weakening incentive for BEH to support BEIH

Liquidity and Debt Structure

Parental Support Drives Liquidity: BEIH had CNY11 billion in bank and other borrowings due within one year at end-June 2023, which is not fully covered by its CNY6.3 billion cash deposits. We expect BEIH to maintain adequate liquidity, premised on continued tangible financial support from the parent in the form of bank guarantees, shareholder loans and credit facilities provided by BEH's finance and leasing subsidiaries. Parental support has led to more diversified funding channels for BEIH. It issued CNY5.5 billion of bonds and asset-backed securities in 2H23, part of which will be used for debt repayment.

Issuer Profile

BEIH is a renewable energy subsidiary of BEH that operates across 24 provinces in mainland China, with a total operating capacity of 6.8GW at end-2022.

Summary of Financial Adjustments

VAT Deduction: Wind and solar farms in China enjoy a 50% value-added tax (VAT) rebate as an incentive for supplying renewable energy. Revenue from wind farms is net of VAT, and only the 50% rebate is reflected in the income statement and included as EBITDA. Wind farms are exempt from VAT in the first five operating years, during which time they do not pay VAT or receive rebates. The amount of VAT that has been exempted, although 100% retained by wind farms, is not reflected in the income statement. We have adjusted BEIH's EBITDA by adding 50% of the VAT that has been exempted.

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.

Public Ratings with Credit Linkage to other ratings

We rate BEIH one notch below its parent, BEH, based on Fitch's Parent and Subsidiary Linkage Rating Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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