Fitch Ratings has affirmed China State Construction International Holdings Limited's (CSCI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'.

The Outlook on the IDR is Stable.

Fitch has also affirmed the 'BBB+' rating on the outstanding US dollar 3.875% senior unsecured notes due 29 November 2027 issued by China State Construction Finance (Cayman) II Limited and guaranteed by CSCI.

The affirmation reflects CSCI's strong linkages with its direct parent, China Overseas Holdings Limited (COHL), and ultimate parent China State Construction Engineering Corporation Ltd (CSCEC, A/Stable), based on the strong parent, weak subsidiary approach under Fitch's Parent and Subsidiary Linkage Rating Criteria. The Stable Outlook reflects Fitch's expectation that CSCI will maintain strong linkages with the parents.

Key Rating Drivers

Rating Linked to Parent: CSCI's ratings are notched down from our assessment of the creditworthiness of COHL. We assess COHL's legal incentive to support CSCI as 'Medium' because of the cross-default clauses in COHL's bank loan documents, where CSCI's default will lead to acceleration at the COHL level.

We also assess COHL's strategic and operational incentive to support CSCI as 'Medium', given CSCI's financial contribution to the parent and its position as the parent's key platform for the construction business. CSCI made up 32% of COHL's revenue, 24% of EBITDA and 20% of debt in 2022.

Revenue Growth to Continue: Fitch expects CSCI's revenue to rise by 3% to around HKD105 billion in 2023, given the high base last year due to significant growth in the Hong Kong business on some projects related to public health. We expect growth to pick up in 2024 and 2025 with around 10% revenue increase on continued expansion in mainland China. CSCI's contract backlog/revenue ratio remained healthy at 3.0x in 2022, underpinning sustained revenue expansion in the future.

Improving Financial Profile: We expect CSCI's leverage, measured by net debt/EBITDA, to improve towards 4.0x over the next few years, on improving cash flow from operations (CFO) and decreasing cash investments in public-private partnership (PPP) projects.

CSCI has been reducing its exposure to PPP projects over the past two years and increasing participation in government-targeted repurchase (GTR) projects, which have faster turnover. Some of the company's PPP projects have also been completed and have started to generate cash inflow, further improving its cash flow. CSCI's interest coverage remains healthy at around 4.0x, given the low borrowing costs as a subsidiary of CSCEC.

Derivation Summary

CSCI's ratings are notched down from our internal assessment of its parent COHL's creditworthiness, based on our Parent and Subsidiary Linkage Rating Criteria and our assessment of 'Medium' legal, operational and strategic incentives for its parent to provide support. Its rating is not derived from its Standalone Credit Profile and therefore is not comparable with industry peers.

Key Assumptions

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

Revenue growth of 3% in 2023 and 10% in 2024-2025;

EBITDA margin stable at around 13% in 2023-2025;

Capital intensity of 0.5% in 2023-2025.

RATING SENSITIVITIES

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

Improvement in the credit profiles of CSCI's parents;

Stronger linkages between CSCI and its parents.

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

Weakening of the credit profiles of CSCI's parents;

Weaker linkages between CSCI and its parents.

Liquidity and Debt Structure

Sufficient Liquidity: CSCI had HKD24 billion in readily available cash at end-2022, against short-term debt of HKD17 billion. We expect the company's cash on its balance sheet and undrawn bank facilities of around HKD90 billion to provide more than adequate liquidity.

Issuer Profile

CSCI is one of the largest general contractors in Hong Kong and Macao. It also engages in integrated urban investment projects in mainland 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

CSCI's rating is derived from its strong parental linkages. CSCI is 65%-owned by COHL, which is wholly owned by CSCEC.

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 www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire