Fitch Ratings has affirmed
The Outlook is Stable.
CRG's parent,
The two entities also have substantial overlap in top management. We used our Government-Related Entities (GRE) Rating Criteria to derive CRG's rating, as we regard CREC as an intermediate holding company with no material operations or substantial debt and look through CREC to the Chinese sovereign (A+/Stable).
Fitch rates CRG using a top-down approach with a score of 30 points under the GRE criteria, based on the government's incentive to provide support and the company's linkage with the government. CRG's IDR is notched down twice from the sovereign's IDR. The Stable Outlook reflects Fitch's expectation of continued state support for CRG.
CRG's Standalone Credit Profile (SCP) of 'bb-' is supported by its strong business profile and access to funding. The SCP is constrained by its rising financial leverage due to investment in public-private partnerships (PPP) and build-operate-transfer (BOT) projects.
Key Rating Drivers
'Strong' Ownership, Support Record: Fitch assesses CRG's status, ownership and control as 'Strong'. The state fully owns CREC, which is CRG's largest shareholder with a 46.96% stake at end-2022. The rest of CRG is held by other shareholders including state-owned
'Strong' Support Incentive: We assess the socio-political implications of a CRG default as 'Strong', as it would significantly disrupt
Solid Infrastructure Market Positions: CRG maintained its solid position in
The government strictly monitors the railway construction sector, from budgeting, ordering and quality to licences. This oversight creates high entry barriers. CRG holds 18 special-grade general contracting qualifications for railway projects, accounting for over 50% of the total number of special-grade qualifications for railway construction in
Expansion Outside Railway Market: We expect CRG to continue expanding non-railway construction segments given sustained weakness in railway investment. The contribution of railway projects to CRG's revenue and gross profit has declined steadily, reaching 21% and 7%, respectively, in 2022 from peaks of 50% and 43% in 2009. Even so, CRG has accelerated expansion in what it calls second-curve business, including water resources, hydropower and renewable energy. New contract signings in the second-curve business surged by 81% in 2022 while total new infrastructure construction contracts rose by 10%.
We believe that CRG can build solid footprints in new markets related to the second-curve business and gain market shares from incumbents, in particular, from those private contractors, given its strength in operation scale, solid record in infrastructure projects, funding access and construction qualifications.
Improved Cash Flow Generation: CRG reported a net cash flow from operations (CFO) of over
Slower Pace in Leverage Build-up: We expect CRG's build-up in leverage to be slower in the coming years than we previously expected as operating cash flow generation gradually improves and the company takes a more cautious and selective approach on investment-driven projects, including PPP and BOT. That said, CRG's net debt/EBITDA is likely to continue increasing to around 6.6x in 2023-2026, from 5.9x in 2022, on funding requirements related to PPP and BOT projects in pipeline and second-curve business, such as the Yunnan Dianzhong water diversion project.
Derivation Summary
CRG's strategic importance to the sovereign is similar to that of other large infrastructure construction companies that operate in sub-segments that have only one or two dominant competitors. For example,
CRG's 'Strong' support record assessment is higher than that of CCCC, as CRG has a stronger financial profile with lower leverage.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth of 4.6%-6.5% in 2023-2026 (2022: 7.6%);
EBITDA margin of 5.2% in 2023-2026 (2022: 5.2%);
Capex of
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 linkages between CRG and CREC;
Weakening of likelihood of support from the Chinese government.
CRG is rated two notches below
For the sovereign rating of
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
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 '
Liquidity and Debt Structure
Sufficient Liquidity: CRG had short-term debt of around
Issuer Profile
CRG shares a duopoly with
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
CRG is rated two notches below
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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