Fitch Ratings has upgraded Power Construction Corporation of China's (PCCC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating to 'A-', from 'BBB+', and removed the ratings from Under Criteria Observation (UCO).

The Outlook is Negative.

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

PCCC's upgrade reflects the application of Fitch's updated Government-Related Entities (GRE) Rating Criteria, published on 12 January 2024. With a support score of 30 points and a Standalone Credit Profile (SCP) of 'b+', Fitch notches PCCC's rating two levels below China's sovereign rating (A+/Negative) according to the notching guideline in the GRE criteria.

The Negative Outlook reflects Fitch's Negative Outlook on China's 'A+' sovereign rating.

Key Rating Drivers

'Strong' State Decision-Making, Oversight: We assess the government's decision-making and oversight over PCCC as 'Strong', because the central State-owned Assets Supervision and Administration Commission (SASAC) 100% owner, effectively controls the board and key senior management, and has a strong influence over the group's principal operations, major strategies and investment decisions.

'Strong' Precedent of Support: PCCC has received substantial and consistent tangible support from the state in the form of capital injections and subsidies. PCCC benefits from consistent financing provided by policy banks and state-owned banks to support its growth in China and internationally.

'Strong' Preservation of Government Policy Role: The company plays a key role in the planning of clean-energy power projects and the process of green transition in China, with a dominant position in engineering and construction (E&C) for clean-energy projects. A default could significantly disrupt the E&C of China's renewable power infrastructures, which would have an impact on electricity supply and energy transition.

'Strong' Contagion Risk: The company is an active domestic bond issuer and a high-profile Chinese state-owned E&C firm internationally. A default would have a significant effect on funding for other state-owned enterprises.

Strong Growth Driven by New-Energy Projects: PCCC maintains its leading market position in the clean-energy power E&C segment, including wind power, solar power and pumped storage power stations. It achieved 12% growth in new contracts in 2022 to CNY1.1 trillion, where clean-energy businesses accounted for 34% of total new orders by value. Fitch expects PCCC to maintain strong growth in new orders driven by power-related projects, especially new-energy projects.

SCP Constrained by Leverage: PCCC's SCP of 'b+' is supported by its strong business profile, with a leading market position in China's power construction market and strong access to funding with low financing costs. The Standalone Credit Profile (SCP) is constrained by high leverage due to sustained operating and investing cash outflows associated with public-private partnerships (PPP) and its own investment in clean-energy power generation capacities.

Derivation Summary

We notch PCCC's IDR two levels below China's Long-Term IDR, reflecting its strong status as a government-related entity (GRE). PCCC's support scores are the same as those of other large SASAC-owned E&C companies that have leading or dominant positions in their respective niche market segments, such as China Communications Construction Company Limited (A-/Negative) in transport infrastructure including roads, bridges and ports.

RATING SENSITIVITIES

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

The Outlook will be revised to Stable if our Outlook on the sovereign is revised to Stable

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

Negative rating action on the Chinese sovereign.

Weakening of the likelihood of support from the Chinese government.

Material deterioration in PCCC's business profile, including loss of leading market position, and significant reduction in the new contract and contract backlog

Material deterioration in PCCC's financial profile, including consolidated EBITDA interest coverage below 1.5x (2022: 2.3x) and/or sustained deterioration in financial leverage

For the sovereign rating of China, the following sensitivities were outlined by Fitch in our Rating Action Commentary on 9 April 2024:

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Public Finances: A continued upward trajectory in general government debt/GDP from persistently high fiscal deficits or a rise in the probability of the materialisation of contingent liabilities, for instance from LGFVs or the financial sector, such that government debt levels compare less favourably with rated peers.

Macro: Reduced confidence in medium-term growth prospects

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Public Finances: Faster deficit reduction consistent with a stabilisation of the general government debt ratio in the medium term, for instance through a stronger and sustained recovery in underlying growth or fiscal reforms which structurally improve local government finances.

Macro: Stronger medium-term growth prospects, which bring per capita GDP more closely in line with rating peers and increases China's weight in the global economy.

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.

Liquidity and Debt Structure

Sufficient Liquidity: PCCC had CNY123.5 billion in short-term debt at end-2022, 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.

Public Ratings with Credit Linkage to other ratings

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