Fitch Ratings has affirmed Power Construction Corporation of China's (PCCC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'.

The Outlook on the IDR is Stable.

The ratings on the medium-term note programme and outstanding senior unsecured debt have also been affirmed at 'BBB+', while the ratings on the senior perpetual capital securities have been affirmed at 'BBB'.

Fitch has notched the IDR three levels below China's Long-Term IDR of 'A+', in line with the agency's top-down approach in our Government-Related Entities (GRE) Rating Criteria. PCCC is wholly owned by China's State-owned Assets Supervision and Administration Commission (SASAC). The approach reflects PCCC's strong operational and strategic ties with the Chinese government. The Stable Outlook reflects Fitch's expectation of continued state support for PCCC, a leading engineering and construction (E&C) company.

Key Rating Drivers

Strong Ownership and Control: Fitch has assessed PCCC's status, ownership and control as 'Strong' as the SASAC fully owns the company, effectively controls the board and key senior management, and has a strong influence over the group's major strategies and investment decisions.

Moderate Importance, Support Record: We assess the socio-political implications from a PCCC default as 'Moderate', considering its substantial exposure to the competitive new-energy business and non-power E&C businesses. Potential disruption to China's power E&C market should PCCC default would be less severe than a decade ago when it held a dominant position in the traditional power E&C sector. We also believe the government's support of PCCC's financial stability and viability has been 'Moderate', as its financial profile has been sustained at a weak level.

Strong Financial Default Implications: Our assessment of the financial implications of a default by PCCC remains 'Strong' despite its moderate social-political implications from a default because the company is an active domestic and overseas debt issuer and creditors regard it as closely associated with the government. A default by PCCC would make funding difficult for other central state-owned entities.

Growing Power Business: PCCC has maintained its leadership in the hydropower E&C segment while it expands in new-energy businesses under the government's drive to modernise China's energy generation industry, including in wind power, solar power and pumped storage power stations. PCCC's new contracts rose 12% yoy in 2022 to CNY1,126 billion, with new-energy businesses accounting for 34% of total new orders by value and 75% of its new contracts in the energy and power business.

Capex Shifting to New Energies: Fitch expects PCCC to adopt a more prudent attitude towards public-private partnership (PPP) projects, which will slow PPP investment, while accelerating investment in new-energy power operations. The company had total controlled new-energy capacity of 17GW at end-2022 and aims to raise the capacity to 56GW by end-2025. We therefore project the company's total capex will rise modestly to CNY65 billion-75 billion per year in the next four years.

SCP Constrained by Leverage: PCCC's 'b+' Standalone Credit Profile (SCP) considers its strong business profile counterbalanced by high leverage due to sustained operating and investing cash outflows associated with PPP and new-energy projects. PCCC's consolidated net debt/EBITDA of 10.3x in 2022 was similar to the 10.2x in 2021. We expect the ratio to stay at 10x-11x on sustained negative free cash flow as PCCC still has abundant investment projects in the pipeline in the medium term.

Derivation Summary

PCCC's IDR is notched three levels below China's Long-Term IDR in accordance with Fitch's GRE criteria. PCCC's socio-political implications of default are assessed as 'Moderate', which is comparable with that of China State Construction Engineering Corporation Ltd (A/Stable), to reflect the more market-driven nature of its business. The assessment is lower than that of China Communications Construction Company Limited (A-/Stable), which has a monopoly in the construction of China's civil and naval-maritime facilities.

PCCC's support record is assessed as 'Moderate', while China State Construction has a 'Strong' assessment. This reflects Fitch's assessment that the financial support received by PCCC has been moderately supportive as its financial profile has remained at a weaker level for a longer period.

PCCC's closest peer is China Energy Engineering Corporation Limited (BBB+/Stable), which shares a duopoly with the company in China's power-construction market. The GRE assessment for both companies is identical.

Key Assumptions

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

Revenue growth of 7%-9% in 2023-2025

EBITDA margin to stay largely stable at 7.5%-8% in 2023-2025

Capex of CNY65 billion-75 billion a year in 2023-2025

RATING SENSITIVITIES

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

Positive rating action on the Chinese sovereign.

Strengthening likelihood of support from the Chinese government.

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

Negative rating action on the Chinese sovereign.

Weakening likelihood of support from the Chinese government.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in our rating action commentary of 15 December 2022:

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

Public Finances: A sustained upward trajectory in government debt/GDP or a rise of contingent liabilities, such that debt levels compare less favourably with rated peers.

Macro: The recurrence of abrupt policy shifts that undermine economic performance and keep growth volatility at elevated levels.

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

Adequate Liquidity: At end-2022, PCCC had CNY123.5 billion in short-term debt, including CNY46.0 billion in receivable factoring facilities. This can be sufficiently covered by CNY108.4 billion in available cash and CNY990 billion in undrawn credit facilities. However, these facilities are uncommitted as committed facilities are uncommon in the Chinese banking industry.

Issuer Profile

PCCC is a wholly state-owned integrated E&C company that provides planning design, engineering construction, equipment manufacturing and operation management services in the fields of hydraulic and hydropower, thermal power, new energy and infrastructure. PCCC's business also extends into real estate, investment and finance.

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 listed below.

Public Ratings with Credit Linkage to other ratings

PCCC is rated three notches below China's sovereign rating under Fitch's GRE 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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