Fitch Ratings has affirmed China Communications Construction Company Limited's (CCCC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'.

The Outlook on the IDR is Stable.

CCCC, a leading transportation infrastructure construction company in China, was ranked the world's fourth-largest engineering and construction (E&C) company by Engineering News-Record (ENR) in 2022. CCCC's parent, China Communications Construction Group (CCCG), is fully owned by the state.

CCCC accounted for the majority of CCCG's revenue, profit, debt, cash and assets. The two entities also have substantial overlap in top management. Fitch used our Government-Related Entities (GRE) Rating Criteria to derive CCCC's rating, as we consider CCCG to be an intermediate holding company and 'look through' CCCG to the China sovereign (A+/Stable).

CCCC's IDR is notched down twice from the sovereign's IDR, in line with the top-down approach in our criteria, to reflect CCCC's strong operational and strategic ties with the Chinese government. The Stable Outlook reflects Fitch's expectation of continued state support for CCCC from the Chinese government. We assess the company's Standalone Credit Profile (SCP) at 'b+'.

Key Rating Drivers

Strong Ownership: Fitch has assessed CCCC's status, ownership and control as 'Strong'. CCCC was 59.63% owned by CCCG at end-2022. CCCC controls all the core E&C operations and assets of CCCG. CCCC's senior management overlaps with that of CCCG, a wholly owned subsidiary of China's State-owned Assets Supervision and Administration Commission (SASAC), as the government has strategic and operational oversight of CCCG and exercises its control over CCCC via CCCG.

Moderate Support Record: Fitch has assessed the record of state support to CCCC as 'Moderate'. The state has been supportive of CCCC's operations with regular government subsidies and preferential tax rates. However, we believe the level of support has been moderate as CCCC's financial leverage has remained high for a sustained period. We expect CCCC's leverage to remain elevated in the medium term as it continues to invest in public-private-partnership (PPP) and build-operate-transfer (BOT) projects although the investment amounts are declining.

Strong Support Incentive: Fitch has assessed the socio-political implications from a default by CCCC as 'Strong'. A default would disrupt construction of China's civil and naval maritime facilities, affecting the long-term deployment of defence assets and development of maritime trade. It could also affect China's Belt and Road Initiative as CCCC plays an important role in building infrastructure in Asia, Africa and eastern Europe. Fitch has assessed the financial implications of a default as 'Strong' as it could reduce capital-market access for the sovereign and other GREs. CCCC is an active bond issuer.

Strategic E&C Position: CCCC maintained its monopoly of China's maritime E&C sector in 2022. It is strategically important to the government's push to boost China's competitiveness in global E&C markets. It signed around USD100 billion of contracts in Belt and Road countries since 2013, making it one of the initiative's largest participants. It is China's largest designer of roads and bridges, and influential in setting E&C standards for the national highway system.

PPP Investments Drive Leverage: We reassessed CCCC's SCP at 'b+' from 'bb-', reflecting our expectation of higher leverage and weaker interest coverage over 2023-2026 than in the last few years. CCCC's consolidated net debt/EBITDA rose to 10.9x in 2022 from 9.2x in 2021 while EBITDA interest coverage fell to 1.9x from 2.2x. This was due to a combination of increased debt for funding PPP and BOT projects and an EBITDA decline caused by higher costs on subcontracting and a larger revenue share from low-margin E&C projects.

We expect CCCC to continue with its PPP investments in the next few years given the abundant PPP projects in the pipeline, although the company is seeking to slow its execution on the projects, which will result in sustained negative free cash flow and rising leverage in the medium term. We also expect EBITDA interest coverage to remain below 2.0x over 2023-2026.

Strong Backlog Supports Revenue: We expect CCCC's revenue to grow at a mid-single-digit rate over 2023-2026, driven by E&C projects with lower margins but better cash generation than investment projects. This is also supported by CCCC's ample order backlog of about CNY3.4 trillion as of end-2022, translating into 4.7x revenue. Its revenue rose by 5.1% to CNY717 billion in 2022, which fell short of our expectations due to the difficulties in executing its projects under China's strict pandemic controls.

Derivation Summary

CCCC's IDR of 'A-', which is notched down two levels from China's Long-Term IDR of 'A+', reflects its strong status as a GRE. CCCC's strategic importance to the state is comparable with that of other large SASAC-owned E&C companies that operate in sectors with only one or two dominant players, such as China Railway Group Limited (CRG, A-/Stable) in railway E&C. Both CCCC and CRG are rated two notches below the sovereign using the top-down approach set out in Fitch's GRE criteria, reflecting their strong linkages with the state.

CCCC's 'Moderate' support track record assessment is lower than that of CRG as CCCC has a weaker financial profile with higher leverage than CRG.

Key Assumptions

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

Revenue growth of 5.7%-6.8% in 2023-2026 (2022: 5.1%)

EBITDA margin of around 6.9%-7.2% in 2023-2026 (2022: 7.3%)

Capex of CNY30 billion-31 billion per annum in 2023-2026 (2022: CNY33.4 billion)

Net investment cash outflow of CNY3.7 billion-4 billion per annum in 2023-2026 associated with PPP and other investment projects

RATING SENSITIVITIES

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

Positive rating action on the Chinese sovereign.

Strengthening of 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 of 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: CCCC's liquidity remained sufficient at end-2022 with around CNY107 billion of available cash and CNY1,495 billion of unutilised credit facilities, which can fully cover its short-term debt of about CNY180 billion (including hybrid securities). However, the facilities are uncommitted as committed facilities are uncommon in China's banking system.

Issuer Profile

CCCC is a leading global transportation infrastructure construction and investment group. It is engaged in a wide range of projects, including highways, bridges, tunnels, railways, subways, marine ports and airports. The company also provides dredging services with the largest dredging fleet in China.

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

CCCC's ratings are linked to China's rating under Fitch's GRE criteria.

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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