[ET Net News Agency, 16 October 2018] S&P Global Ratings said today that it revised its
outlook on China State Construction International Holdings Ltd. (CSCI)(03311) to negative
from stable.
At the same time, the credit rating agency affirmed its 'BBB' long-term issuer credit
rating on the Chinese construction company. S&P revised the outlook to negative to reflect
the low visibility over CSCI's deleveraging prospects over the next 12-24 months.
It said CSCI's expenditure on investment-linked projects in China in the past 18 months
has been much higher than S&P had expected, and the company plans to continue to spend on
such projects.
The significant cash outflows to fund these projects weakened CSCI's ratio of funds from
operations (FFO) to debt to 18% at the end of June 2018, from 22% in 2017 and 31% in 2016.
S&P thinks CSCI will continue to find it difficult to generate positive operating cash
flows over 2018-2019. The company's operating cash outflows of HK$5.2 billion in 2017 and
HK$4.3 billion in the first half of 2018 were much weaker than S&P's previous forecast of
marginal inflow.
Investment projects, mainly in the form of public private partnership (PPP), account for
a majority of CSCI's project backlog. These projects require substantial upfront
investment and generate cash flows only over the long term.
The agency estimated that the company's working capital spending on its backlog will be
HK$20 billion-HK$40 billion in the next few years.
Although CSCI intends to lower its capital commitment through a variety of alternatives,
the level and the timeframe of deleveraging is uncertain. For example, management is
looking to divest projects worth US$1 billion-US$2 billion to a consortium that includes
CSCI, the parent, and other investors. The proportion of investment-linked projects
reduced to 77% of the total backlog as of 30 June 2018, from 82% as of end-2017.
That's mainly because of new contracts in conventional construction projects with good
cash collection in Hong Kong and Macau and small divestments in PPP projects. However, in
China's tightening capital market, investors, including potential ones in CSCI's PPP
projects, are now taking time to seek higher risk premiums. (KL)