Investing.com -- Moody’s Ratings has confirmed the Baa1 issuer rating and ba1 Baseline Credit Assessment (BCA) for China Communications Construction Co., Ltd. (CCCC). The ratings for the subordinated perpetual notes issued by CCCI Treasure Limited, which are unconditionally and irrevocably guaranteed by CCCC, have also been affirmed at Baa2. However, Moody’s has altered the outlook for all these ratings from stable to negative.
The negative outlook is a reflection of the company’s high leverage and the hurdles it faces in reducing this leverage due to slower EBITDA growth and ongoing investment requirements, according to Yuting Liu, Moody’s Ratings Vice President and Senior Analyst. Liu also added that the affirmation of CCCC’s rating is due to the company’s leading position in China’s transportation infrastructure construction sector, its strong access to funding, and the expectation that the company’s strategic significance to the Chinese economy will continue.
CCCC’s Baa1 issuer rating takes into account its BCA of ba1 and a three-notch uplift based on the expectation of substantial support from the Chinese government (A1 negative), given CCCC’s high dependence on it. The company is majority-owned and controlled by China’s State-Owned Assets Supervision and Administration Commission (SASAC), which oversees CCCC’s strategy and financial policy. CCCC’s strategic importance to China’s transportation and infrastructure industry, the high reputational risk for the Chinese government if CCCC faces financial distress, and its history of government support also contribute to this support assessment.
CCCC’s ba1 BCA is supported by its large scale and strong business position in China’s transportation and infrastructure construction sector, its revenue visibility due to a large order backlog, and the solid margins of its core construction business. However, it is limited by its high leverage due to its debt-funded investments in public-private partnership (PPP) projects, and execution risks related to these PPP investments and the company’s international expansion.
CCCC’s leverage, as calculated by Moody’s-adjusted debt/EBITDA, increased to 9.7x in 2024 from 8.5x in 2023 due to lower EBITDA and a continuous increase in debt to finance ongoing projects and cover a larger working capital gap. CCCC’s EBITDA is expected to grow modestly over the next 6-12 months, and its debt growth is anticipated to slow down as the company scales down new investments in PPP projects and continues to improve its working capital management.
CCCC has been transitioning from a traditional engineering-procurement-construction (EPC) company into an integrated infrastructure builder, investor, and operator, with significant exposure to infrastructure PPP projects. As CCCC consolidates long-dated PPP project assets and debts, its leverage trends higher than traditional EPC construction companies. However, CCCC’s leverage would be around 6.2x for 2024, excluding consolidated PPP project-related debts, which are not guaranteed by CCCC.
CCCC’s reported cash balance and projected adjusted operating cash flow are not enough to cover its reported short-term debt and expected capital spending. Nevertheless, the company has very strong access to domestic bank facilities and capital markets due to its central state-owned enterprise background.
An upgrade of CCCC’s ratings is unlikely, given the negative outlook. However, a downgrade could occur if the company’s financial performance remains weak for its BCA, or if the company’s adjusted debt/EBITDA is unlikely to stay below 8.5x-9.0x in the upcoming quarters. A downgrade could also occur without lowering the company’s BCA if the company’s importance to the Chinese government is assessed to have declined.
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