SHENZHEN EXPRESSWAY CORPORATION LIMITED
Fitch Ratings has affirmed
The Outlook is Negative. Fitch has simultaneously withdrawn the ratings on SZE.
SZE's IDR is equalised with that of its parent,
The Negative Outlook reflects our expectation that net leverage at the group consolidated level will remain high in the medium term, driven by a decline in EBITDA in 2022 due to the pandemic, reliance on short-term debt and previous debt-funded expansions. The SCP reflects SZE's robust expressway portfolio, which comprises high-quality assets with a larger commuter base. The assets are mainly in
Fitch has chosen to withdraw the ratings of SZE for commercial reasons.
KEY RATING DRIVERS
Strong Linkage with Parent
SZIH holds a 51.56% controlling interest in SZE. We expect SZE to benefit from state support through its parent, and rate SZE using a 'top-down minus one' approach, based on 'Weak' legal, 'High' strategic and 'Medium' operational linkages with SZIH under the 'stronger parent' path in our criteria. This allows for SZE's IDR to be equalised with that of the parent as SZE's SCP is one notch below SZIH's supported IDR.
We expect SZE to account for more than 70% of SZIH's Fitch-adjusted EBITDA, including associate dividends in the medium term. We believe SZE's financial and dividend contribution to SZIH will remain significant in the medium term, which is critical in supporting SZIH's expansion agenda.
Strategic, Robust Expressway Network - Revenue Risk (Volume): High Midrange
The majority of SZE's expressways are in the wealthy
Toll rates on the network are generally low due to restrictions, with the government occasionally imposing reductions. Volume risk is constrained to 'High Midrange' due to SZE's rising exposure to non-toll road businesses, which have slightly different risk profiles from its core toll-road business. Fitch does not expect meaningful EBITDA contribution from the non-toll road businesses in the near term.
Opaque Regulatory Framework - Revenue Risk (Price): Weaker
The price risk is a weaker attribute due to a lack of transparency and predictability in the regulatory framework. Toll-rate setting and adjustments are highly regulated by the government with limited flexibility for operators to recover higher costs due to inflation. Most of the prevailing toll rates have been unchanged for a number of years with no visibility of any increases in the future.
The government has imposed adverse policies, such as tariff cuts and toll exemptions, resulting in a decline in the average toll rate. However, we believe these policies will reduce congestion on road networks and boost traffic, which will in turn benefit the company in the long run.
Highly Defined, Flexible Capex Plan -
SZE has considerable experience and expertise in delivering on its network investment. Its planned capex over the next three years is substantial at about
Non-Amortising Uncovenanted Debt - Debt Structure: Midrange
SZE's debt structure is typical of a Chinese corporate borrower, as it is funded by non-amortising debt with few of the protective covenants that would be commonly seen in a project finance-type structure. Refinancing risk is mitigated by the company's ample liquidity, comprising cash and significant standby bank facilities, a well-diversified schedule of bullet maturities, a record of prudent debt management and solid access to the capital market.
Interest risk exposure to the country's benchmark lending rate and loan prime rate is manageable because adjustments to the two rates are infrequent and we do not expect them to rise in the near term. Nevertheless, we have considered the risk in our rating case by adding a stress of 200bp on the existing rate.
Financial Profile
We expect a strong rebound in SZE's toll traffic and waste management business in 2023 and 2024 as Covid-related restrictions were removed at the end of 2022 and business activity recovers. However, EBITDA growth from traffic recovery will be largely muted by concession expiry for several toll assets over the next few years.
Fitch's base case (FBC) assumptions are largely in line with management's forecast. The FBC assumes revenue growth of 15% to 28% in 2023 for individual toll assets, with an overall toll revenue growth of around 13%. After 2023, we expect annual revenue growth of 2% to 8% for individual toll assets.
The FBC also assumes strong growth in the environmental protection segment in 2023, driven by commissioning of new projects and full-year consolidation of recently acquired projects. We expect revenue growth to moderate to around 2% to 17% after 2024. The FBC assumes stagnant revenue growth for the existing wind projects of the clean energy segment. EBITDA margins for all business segments are largely in line with pre-pandemic historical trends. The FBC also assumes capex at between
The Fitch rating case (FRC) incorporates a number of stresses, mainly haircuts of 1-2pp on base case revenue and EBITDA margins, 200bp stress in floating interest rates, 3pp stress in capex and 5pp stress in the dividend payout ratio.
The FBC and FRC do not take into consideration revenue growth and capex arising from the
Net leverage peaks at 5.1x in 2023 under the FBC, before declining gradually below 5.0x in 2025. The projected five-year average net leverage is 4.4x.
Similar to the trend in the FBC, the FRC net leverage peaks at 5.5x in 2023, before declining to below 5.0x in 2025. The projected five-year average net leverage is 5.0x.
PEER GROUP
SZE compares well with
Nevertheless, SZE has less rating headroom than YXT. In the FRC, SZE's net leverage converges to the level of the 'bbb' downward trigger in the next two to three years, before declining gradually.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
No longer relevant as the ratings have been withdrawn.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
No longer relevant as the ratings have been withdrawn.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
CREDIT UPDATE
Revenue decreased by around 14% during in 2022 as a result of stringent pandemic-related restrictions that were in place longer than expected in
That said, toll revenue rebounded strongly in 1Q23 to the 2021 level after
In March, SZE announced the termination of the PPP arrangement for
SZE's borrowing repayments due within a year increased significantly to more than 50% of total borrowings in 2022, from 30% in 2021. However, SZE's liquidity risk is mitigated by its solid access to capital markets, as well as adequate internal cash and unused credit facilities to cover its 2023 debt obligations.
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
SZE's rating is equalised with its parent, SZIH.
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.
Following the withdrawal of ratings for SZE, Fitch will no longer be providing the associated ESG Relevance Scores.
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