Fitch Ratings has affirmed China Resources Gas Group Limited's (CRG) Long-Term Issuer Default Rating (IDR) at 'A-'.
The Outlook is Stable. The agency has also affirmed CRG's 'A-' senior unsecured rating.
CRG's IDR reflects its 'a-' Standalone Credit Profile (SCP), underpinned by its large scale, stable quasi-regulated earnings, geographic diversification with large exposure to higher-tier cities, competitive gas procurement strategies, and strong financial discipline, with one of the strongest financial profiles among rated peers.
We expect CRG to sustain a strong balance sheet, even amid the high gas-price environment and capex peak due to the construction of a liquefied natural gas (LNG) terminal. We estimate net debt/EBITDA to remain at 0.3x or below in 2022-2025.
CRG's IDR will remain unchanged, even if the SCP deteriorates to 'bbb+', reflecting our assessment of 'Medium' operational and strategic incentives for its 61.47% parent, China Resources Holdings Limited (CRH), to provide support under Parent and Subsidiary Rating Linkage Criteria.
Key Rating Drivers
Slower Volume Growth: The more stringent Covid-19 lockdowns in eastern China, where CRG has high exposure, dented gas consumption of commercial and industrial users, leading to lower sales volume growth in 5M22. We expect some recovery, as China has gradually lifted the pandemic-related restrictions on travel and economic activity from June, while CRG, despite of slower volume growth, still expects to outperform national gas consumption growth by 3%-5% in 2022, aided by acquisitions.
CRG's gas sales volume rose by 15% yoy on average in 2018-2021, following its active, albeit prudent, acquisitions and strong gas demand from well-located projects, mostly in wealthier, densely populated municipalities.
Narrowing Dollar Margin: The dollar margin is likely to narrow in 2022, albeit in a smaller magnitude than the CNY0.07/cubic metre drop in 2021. We estimate this, coupled with lower volume growth, may cut EBITDA by a single-digit percentage in 2022. The weak margin reflects pressure from surging gas prices and delayed cost pass through amid the pandemic, but is mitigated by CRG's solid relationship with upstream state-owned producers, strong local-government support in facilitating cost pass through to large users and effective cost control.
Earnings to Rebound From 2023: We expect a rebound in the dollar margin from 2023 as gas prices moderate and CRG further optimises its procurement sources and customer mix. This, along with a recovery of sales growth, should drive up EBITDA by the mid-to-high-teens in 2023-2025.
Earnings growth should also be supported by higher income from other segments, including integrated energy and services, which we estimate may more than double from 2021 levels by 2025. We also expect dividends from new joint ventures to boost cash flow in 2024-2025.
Lower Contribution from Connections: We expect gas connections to fall to 3.2 million-3.5 million in 2022, from more than 3.5 million in 2021, given the country's weak new housing-development sector, to be partly offset by a rise in concessions. We estimate the EBITDA contribution from gas connections will drop by 20% to around 13% in 2025, as other segments expand faster. Such a change to the segment mix should be positive for cash flow stability, as connection fees are non-recurring by nature.
Low Leverage, Despite High Investments: We expect cash capex and acquisitions to stay high through to 2024, at HKD10 billion-11 billion (2021: HKD10 billion), due to the LNG terminal construction and industry consolidation opportunities. This is likely to keep free cash flow after acquisitions and investments in affiliates negative, while net debt/EBITDA may reach 0.3x in 2024, from net cash in 2021, before falling below 0.2x in 2025, as the LNG terminal starts operation and earlier investments generate cash flow. Rating headroom should stay ample.
CRG has one of the strongest financial profiles of rated Chinese city-gas operators. We consider Kunlun Energy Company Limited (A/Stable) as CRG's closest peer, in light of similar business profiles as large city-gate gas operators with national outreach.
Kunlun has a procurement-cost advantage as a subsidiary of China National Petroleum Corporation (A+/Stable), with stronger vertical integration and lower exposure to the one-off connection business, while CRG has greater exposure to high-tier markets, with stronger demand growth potential and smooth pass-through. Both expect low leverage over the medium term.
Growth rate of gas sales volume on a consolidated basis to outperform China's national average by 3% in 2022, before rebounding by a teen percentage over the medium term
Dollar margin to narrow in 2022 before rebounding; gas cost assumptions in line with Fitch's price deck
Household connection additions to slow from 2021 levels, but stay at above 3.2 million in 2022; connected households to approach 60 million by 2025
The new LNG terminal to commence operation in 2025
Annual investments, including capex, acquisitions and injections in joint ventures and associates, to stay at HKD10-11 billion in 2022-2024, before falling to below HKD8 billion in 2025
CRH to continue providing shareholder loans to CRG at around HKD3 billion; internal loans to CRH's other subsidiaries to stay at around HKD1 billion
Common dividend pay-out to rise over the medium term
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A higher internal assessment of CRH's credit profile, provided CRH's incentives to support CRG remain intact
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weakened SCP, evidenced by net debt/EBITDA and FFO net leverage above 2x for a sustained period, and weakened incentives for CRH to support CRG
Material deterioration of our internal assessment of CRH's credit profile
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
Very Strong Liquidity: CRG has very strong liquidity, illustrated by its HKD7.6 billion in cash against short-term debt of HKD6.3 billion as of end-2021. The majority of short-term debt comprises offshore US-dollar bonds, which amounted to USD716.4 million as of end-2021 and have been refinanced by loans at lower interest rates in 1H22. Liquidity is further supported by diversified funding channels, including HKD22.2 billion of undrawn bank facilities as of end-2021.
CRG is a leading city gas distributor in China with nationwide coverage. It is 61.47% owned and controlled by CRH, which is wholly owned by China's State-owned Assets Supervision and Administration Commission.
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.
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