This is a correction of a release published 6 October 2022.

It corrects the debt type for the bonds under the issuing entities in the list of rating actions.

Fitch Ratings has published Beijing Enterprises Holdings Limited's (BEHL) Long-Term Issuer Default Rating (IDR) of 'A', with a Stable Outlook. Fitch has also assigned a senior unsecured rating of 'A'.

Simultaneously, Fitch has published the 'A' ratings on all of BEHL's existing US dollar and euro bonds that are unconditionally and irrevocably guaranteed by BEHL. A full list of rating actions is below.

BEHL's IDR is aligned with Fitch's internal credit assessment of the parent, Beijing Enterprises Group (BEG), which owns of 62.3% the subsidiary. The assessment under Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria is driven by BEG's 'High' strategic and operational incentives to support BEHL. BEHL holds BEG's most strategic assets and contributes the majority of the parent's EBITDA.

Fitch's assessment of BEG is linked to, but not equalised with Fitch's internal assessment of the creditworthiness of the Beijing municipality, based on Fitch's Government-Related Entities (GRE) Rating Criteria. BEG is wholly owned by Beijing State-owned Assets Supervision and Administration Commission (SASAC). We expect a high likelihood of government support, underpinned by BEG's strategic role as the city's integrated municipal utilities and public service platform.

Key Rating Drivers

Parent's ' Strong' State Linkage: Fitch assesses BEG's status, ownership and control by the state as 'Very Strong'. The Beijing municipal government has strong control of BEG's strategies, operations and key management appointments, and BEG's role as the city's state-owned capital investment and operation platform in the utilities sector is closely aligned with the government's economic and public planning. Fitch assesses BEG's support record as 'Strong', reflecting frequent government grants and equity injections, as well as policy support for its gas business in Beijing.

Parent's 'Strong' Implication of Default: We assess BEG's socio-political implication of default as 'Strong'. BEG supplies 95% of gas in Beijing, and operates some of the city's water and waste projects via subsidiaries. It was also mandated to build symbolic infrastructure projects. It would be difficult to find substitutes should BEG default given its broad policy mandate. The financial implications of a default are assessed as 'Strong'. BEG and its subsidiaries are frequent issuers in domestic and offshore bond markets. Its default would jeopardise other Beijing GREs' access to funding.

'High' Strategic Incentive: We assess BEHL's financial contribution to BEG as 'High'. It accounts for 56% of BEG's EBITDA and 47% of assets. Competitive advantage is also 'High', as the company holds BEG's most strategic public utilities, including natural gas distribution, water and solid waste treatment.

BEHL serves a critical role on BEG's behalf in executing key municipal mandates on energy security and environmental protection. BEHL is also an important funding platform for BEG with access to overseas equity and debt markets. Growth potential is assessed as 'Medium', reflecting moderate prospects of growth in Beijing's natural gas consumption and BEHL's waste and water segments.

'High' Operational Incentive: This assessment reflects that a high degree of brand and management overlap outweighs the low level of operational synergies between BEHL and BEG. We see a considerable amount of management integration and personnel rotations. The majority of BEHL's executive directors have also served on BEG's management team, and we believe BEG has significant influence on BEHL's strategic, financial and operational decisions. BEHL and some of its major subsidiaries also share the same brand name as BEG.

'Medium' Legal Incentive: Our 'Medium' assessment on this factor reflects the potential for BEHL to trigger the cross-default clause for some of BEG's domestic debt instruments.

Stable Business Profile: BEHL's standalone credit profile (SCP) is assessed at 'bbb', underpinned by the stable cash flow from its core operations. Beijing Gas Group Co., Ltd. (A/Stable) is one of the most stable city gas operators in China due to its high exposure to non-cyclical customers and no reliance on connection revenue. Its dollar margin is less prone to international gas cost changes because of the stable piped gas supply. BEHL's waste and water treatment businesses are leaders in their respective operational sectors and generate steady cash flows after projects ramp up, despite high capital outlays.

Moderate Leverage: BEHL's leverage, measured by net debt/EBITDA after proportionately consolidating BE Water, was 4.4x at end-2021 (2020: 5.2x). We expect leverage to rise to around 4.8x in 2022-2024 on higher capex at Beijing Gas' Nangang LNG terminal, before gradually trending lower.

Holding-company interest coverage remains adequate despite sizeable debt at the BEHL level, while BEHL maintains strong financing capability as part of BEG.

Derivation Summary

BEHL's ratings are credit-linked to our internal assessment of the parent, BEG, because of strong parent-subsidiary linkages, based on the 'Moderate' legal incentives, 'High' strategic incentives and 'High' operational incentives.

Key Assumptions

Beijing Gas: We factor in a CNY0.02/cubic metre drop in the dollar margin during 2022-2024 to take into account potential fluctuations in gas costs. Stable gas sales volume growth with a low-single-digit increase each year in 2022-2024.

BE Water: Proportion of construction revenue to decline during 2022-2025 to reflect the company's change of strategy towards an asset-light model. We expect 2.2 million-2.9 million tonnes a day of additional water supply and wastewater treatment capacity to be operational during 2022-2025, with a stable margin.

Beijing Yanjing Brewery Co., Ltd: We expect volume to increase by 1.5%-3% a year during 2022-2025, driven by high-end products. The average selling price to increase by 3%-6% a year to reflect product branding that accentuates quality.

China Gas: Total new residential connections of about 2.5 million-2.75 million per year, with township connections of 150,000 a year during FY22-FY25. Gas sales volume to continue increasing in the double digits. Dollar margin is expected to drop by CNY0.02/cubic metre in FY22 and gradually recover thereafter.

RATING SENSITIVITIES

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

Improvement in Fitch's internal assessment of the creditworthiness of BEG, provided BEG's incentive to support BEHL remains unchanged.

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

Evidence of weakening incentive to support by BEG;

Lowering of Fitch's internal assessment of the creditworthiness of the BEG.

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

Comfortable Liquidity: The company had total borrowings of HKD71.8 billion as of end-June 2022, of which HKD22.3 billion was maturing in one year. Short-term debt accounted for 31% of total debt. The company has HKD31.3 billion in available cash on hand, which is more than enough to cover the short-term obligations. The US dollar and euro bonds maturing in 2022 were refinanced with bridging bank loans.

Issuer Profile

BEHL is 62.3% owned by BEG. BEHL is mainly engaged in the city gas distribution, brewery, water and waste treatment businesses.

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

The ratings on BEHL are linked with the creditworthiness of BEG.

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

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