Fitch Ratings has revised
Fitch has simultaneously withdrawn the rating.
The Outlook revision reflects our expectation that Zhongyu's Fitch-defined EBITDA net leverage may be sustained above 5.5x, a positive rating sensitivity, over the next four years, driven by slower profit growth from the value-added service (VAS) and smart-energy business segment. We have lowered our forecasts materially for the non-gas business segment's profit growth over the next four years, as the company's top-line and profitability underperformance in 1H22 suggests it faces challenges in achieving the targets it previously set.
Fitch has chosen to withdraw the rating for commercial reasons.
Key Rating Drivers
Non-Gas Business Growth Below Expectation: The gross profit of Zhongyu's non-gas smart-energy and VAS business declined by 2% yoy in 1H22, worse than Fitch's expectation of a 10% rise. The gross profit margin (GPM) for the smart-energy business was 32% in 1H22, much lower than our estimate of 70% due to slow ramp-up of solar power projects. VAS revenue dropped by 31% yoy in 1H22 as new connections remained weak.
We now expect the company to miss its smart-energy GPM target of 70%-90%, its previous guidance to Fitch, in 2022-2025 as the ramp-up of solar power plants has been much slower than expected, while other non-gas businesses such as the provision of integrated energy, heating and cooling services have lower margins. We have also lowered our forecast for VAS revenue growth due to uncertainties in the domestic property market.
Difficulty in Deleveraging: We expect Zhongyu's Fitch-defined EBITDA net leverage to reach 5.5x-5.8x in 2022-2025 from 4.8x in 2021 after incorporating our revised assumptions for the smart-energy and VAS business. We expect capex to gradually decline on lower investment in rural coal-to-gas projects, although this will depend on the pace of capacity addition for smart energy.
Slide in New Connection Revenue: We estimate a decline of 28% and 7% in new connections during 2022 and 2023, respectively, as
Improved Dollar Margin: Zhongyu's dollar margin improved by
We estimate Zhongyu's yoy dollar margin improvement continued in 2H22. Soft natural gas sales consumption in
Slower Gas Sales Volume Growth: We estimate Zhongyu's retail gas sales volume growth moderated to 4% in 2022, from 16% in 2021.
Rising Interest Rates: Zhongyu's offshore loan proportion reached 76% by
Derivation Summary
Zhongyu's 'B+' rating reflects its elevated leverage against a relatively stable and resilient business profile as a city-gas distributor in
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Retail gas sales volume CAGR of 8% during 2021-2025, supported by increasing sales volume from rural projects and higher gas sales penetration in
Steady retail dollar margin in 2022, despite higher gas costs as the company continued to optimise its gas supply mix through its gas procurement management centre. Dollar margin to increase slightly in 2023-2025 on lower gas costs.
New connections dropping by 28% in 2022 due to the property market turmoil, and decline by another 7% during 2023-2025.
Smart-energy business' installed capacity to reach 550MW by 2025 with average utilisation hours of 1,350.
Capex to decline to about
RATING SENSITIVITIES
Not applicable as the rating has been withdrawn.
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
Manageable Refinancing Risks: Zhongyu reported available cash of
Its sound banking relationships and record of refinancing will also help in obtaining additional working-capital loan facilities, if needed. The company also has large encumbered assets, which can be used to secure bank financing.
Issuer Profile
Zhongyu was established in 2002 with dual headquarters in
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.
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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