Asia Pacific Credit Research
04 June 2018
China Local Government
Financing Vehicles
A rough (and tough) ride ahead given limited
transparency, but there are alternatives
Asia Corporate Research
Varun Ahuja, CFA
AC
(852) 2800 6038
@
Tiantian Teng
AC
(852) 2800-7024
@
. Morgan Securities (Asia Pacific) Limited
See page 33 for analyst certification and important disclosures.
. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
The emergence of LGFVs and their growing representation in the USD bond
markets continues to catch investor interest. Major policy shifts have raised
questions as to whether all LGFV can be considered provincial debt, and this is
further underscored by recent onshore defaults, including some SOEs, leading to
more muted supply and wider spreads for the LGFV sector. In this report, we
present an update on recent policy changes as well as our views on their impact
on the LGFV sector. In an environment where onshore default rates are rising and
transparency stays low, we remain cautious on the sector as a whole, preferring
to own stronger SOEs rather than LGFVs. That said, we do make exceptions for a
few LGFVs that play strong policy roles (willingness) and backed by stronger
provincial governments (capacity). We also believe that while one or a few LGFV
defaults would be acceptable to the central government, widespread defaults are
unlikely given the larger implications for the financial sector. We initiate coverage
of Wuhan Metro and its ‘19s with OW, Neutral on BJSTAT and its ‘20s and ‘25s,
on Yanzhou Coal and its perps ‘c20s, '22s with OW with the bonds trading wider
than even Indika, which we think does not make complete sense.
The central government would continue to make LGFVs more market-
oriented, as part of the ongoing deleveraging drive. Since the budget law
revision in 2014, the government has released a number of documentations
around LGFV operations and their funding, which we discuss in this note.
Pace of issuance has slowed down in recent times. The issuance of LGFVs
USD bonds had increased substantially over 2015-2017 due to onshore issuance
policy tightening as well as LGFV’s funding diversification. However, this has
slowed drastically in recent months, due to the central government’s tightening
policy to address debt overhang problems in the system. In addition, recent
onshore defaults have given further apprehension about exposure to the sector,
where underlying information flow remains very limited.
Staying cautious on sector and preference for LGFVs with clear policy role
only. While LGFVs have risen to be a ‘too big to ignore’ sector in JACI, the lack
of information flow and opacity in underlying businesses remain key concerns,
especially in the current environment. We would stick to LGFVs with clear
strategically important roles and ideally with decent standalone credit profiles.
Having said that, there are certain LGFVs that are quite wide in the 1-2yr
duration bucket, which present investors with the conundrum of missing
out on better yields if not invested but having a high ‘jump risk’ if any of these
LGFVs widen materially due to financial constraints, which are difficult to
monitor given inadequate underlying information flow.
Hence, in this note, while we categorize LGFVs based on factors such as
policy role, social and economic importance, etc., given that most LGFVs are
trading as a ‘group’ in different yield buckets, we would look to take selective
exposure in LGFVs through credits in the ‘preferred’ and ‘some comfort’
categories, while for exposure to higher yields, we are more comfortable with
the risk-reward and information flow in other China SOEs and HY corporates as
presented in this report.
Completed 04 Jun 2018 05:55 PM HKT
Disseminated 04 Jun 2018 06:08 PM HKT
2
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table of Contents
Onshore defaults back in focus ..............................................3
LGFV policy changes in recent years.....................................5
Document & : weakening the ties between local governments and
LGFVs....................................................................................................................5
Relative value............................................................................7
Sector strategy and key recommendations ...........................9
Background of LGFVs ..........................................................................................16
Categorization of LGFVs........................................................18
Technicals: Less negative due to lower supply but investor
base still narrow .....................................................................20
Bond supply should slow going forward ................................................................21
Investor base remains narrow as Asia continues to dominate ..................................22
Background of Individual LGFVs..........................................24
3
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Onshore defaults back in focus
Focus is back on onshore defaults, especially from the weaker government-
owned entities, after China Energy Reserve and Chemicals Group (CERCG, not
covered) defaulted on the principal repayment of its US$350 million offshore bonds,
which triggered a cross-default to all of its outstanding debt.
While the company classifies itself as an SOE in the bond prospectus, there remains
a question-mark on the company's actual shareholding structure, as per newswires
(. Debtwire and other local news). The company was reportedly ~30% owned by
the Beijing Municipal Commission of Commerce, 28% by CNPC through its
engineering arm; and ~15% by China Economic Cooperation Center, however, its
shareholding structure has since changed based on the company’s latest presentation.
Interestingly, just a few months ago, the company was in news (source: SCMP) to buy
a marquee commercial building in Central, Hong Kong, from CK Assets for ~US$5
billion. CERCG is involved in the oil & gas trading, logistics and distribution, etc.
segments. In its disclosure announcement post its principal repayment default, it guided
that it is unable to make the payment due to tightening conditions in the PRC over the
last two years, which restricted its financing channels, including access to bank funding.
As per CERCG, it aims to divest some assets to improve its cash flow situation.
Separately, there has been more news on LGFV defaults. Reuters recently
reported that a firm controlled by a city government in Inner Mongolia region had
failed to pay interest and principals on about RMB4 billion of off balance sheet
loans. The article suggested that the firm should be technically in default after
missing payments but more information is needed to determine whether it was
actually a missing payment or a delayed payment.
Figure 1: Onshore defaults in China (US$ million)
Source: WIND and . Morgan estimates.
Defaults in China, including those from the SOEs, are not something that is
entirely new, but have been ongoing for quite some time now. At the time of
commodity downturn in 2015-16, there were several credits, mainly in the metals and
mining sector, that faced liquidity pressure. While 2016 was a recent high, we think
the government will slowly but surely let more companies including some local
SOEs default, as long as it does not present a systemic risk to the broader financial
sector.
2,
3,
4,
2,
0
1,000
2,000
3,000
4,000
5,000
6,000
2016 2017 2018YTD
SOE Non-SOE
4
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 1: List of defaults from Chinese issuers in 2018
Issuer Province Industry
SOE or Non-
SOE
Default date Amt (US$ mm) Coupon
CEFC China Energy Co. Shanghai Oil & Gas Non-SOE 21-May-18
Sichuan Coal Industry Group Sichuan Metals & Mining SOE 21-May-18
Fuguiniao Co. Fujian Consumer Non-SOE 9-May-18
Kaidi Ecological and Env. Tech. Co. Hubei Utilities Non-SOE 7-May-18
China Security Co. Shanghai TMT Non-SOE 7-May-18
Evergreen Holding Group Zhejiang Industrial Non-SOE 24-Apr-18
Fuguiniao Co. Fujian Consumer Non-SOE 23-Apr-18
Yiyang Group Holdings Heilongjiang Diversified Non-SOE 17-Apr-18
Shenwu Env Tech Co. Beijing Industrial Non-SOE 14-Mar-18
Dandong Port Group Liaoning Transport Non-SOE 13-Mar-18
Dandong Port Group Liaoning Transport Non-SOE 12-Mar-18
China City Construction Beijing Infrastructure Non-SOE 1-Mar-18
Yiyang Group Holdings Heilongjiang Diversified Non-SOE 28-Feb-18
Dalian Machine Tool Group Corp Liaoning Industrial Non-SOE 7-Feb-18
Dandong Port Group Liaoning Transport Non-SOE 29-Jan-18
Yiyang Group Holdings Heilongjiang Diversified Non-SOE 27-Jan-18
Dandong Port Group Liaoning Transport Non-SOE 15-Jan-18
Dalian Machine Tool Group Corp Liaoning Industrial Non-SOE 15-Jan-18
Sichuan Coal Industry Group Sichuan M&M SOE 9-Jan-18
Source: WIND, Bloomberg and . Morgan estimates.
Similarly, some LGFVs default(s) are possible, but a widespread phenomenon
would be too disruptive. We believe that while the probability of one / a few LGFV
defaults exists, the Chinese government is unlikely to allow multiple / large-scale
defaults from the sector. This is because the scenario could trigger substantial
damage, not just in the respective region especially if the LGFVs execute an
important socio-economic role, but also in the broader financial markets. This could
further lead to material increases in the cost of funding and impact credit availability.
Hence, we still expect most of the LGFVs to be supported to remain solvent although
there is a real possibility, in our view, for the government to accept a few defaults as
an example to balance discipline in financial markets with moral hazard problems.
We also think that as time passes with some defaults occurring each year,
market participants will start factoring in as well as reacting to defaults in a much
more rational manner rather than a kneejerk reaction. Ultimately, this ‘soft transition’
from a market that had seen almost no defaults before 2014 to one where a default is
seen as a ‘normal’ probability in the markets is also what the government is trying to
achieve in the current period.
5
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
LGFV policy changes in recent years
Since the budget law revision in 2014, the government has taken further steps to
tighten policies on local government funding and LGFVs’ borrowing activities.
Government authorities released Article No. 43 in 2014 and Article No. 4 in 2016 to
separate the financing function of LGFVs from local governments and to prevent
LGFVs from using land pledges to obtain financing.
Higher-tier local governments were only allowed to issue bonds directly but not
through LGFVs or enterprises. The authorities also introduced the bond swap
program to refinance legacy LGFV debts – basically it is a practice to swap LGFV
debts into lower-yielding munis so that interest on these products can be effectively
reduced.
The government thereafter introduced several more regulatory measures, including:
1) Document No. 50 (May-2017), which reinforces the policy goal of Article No. 43
to prohibit local government off-budget borrowing, 2) Document No. 87 (June-
2017), which prohibits illegal financing behavior in purchasing certain services of
LGFVs by local governments. The most recent development was in April 2018, the
Ministry of Finance (MoF) released Notice 23 to regulate state-owned bank lending
activities, particularly to LGFVs.
Notice 23: curbing financing sources to LGFVs
Notice 23 was released by the Ministry of Finance in April, mainly towards
state-owned bank lending activities and targets, among which LGFVs were
included. The Notice guided that banks should not aggressively lend to local
governments for new projects, investment funds or PPP projects. It is consistent with
the central government’s deleveraging campaign by curbing several expansionary
infrastructure projects to prevent further leverage build-up in the financial system.
This policy update (Notice 23) also pointed out that when state-owned financial
institutions serve as underwriters, they must assess the issuers’ ability to repay and
are not allowed to indicate implicit or direct local government support. Stricter
underwriting standards should make funding availability somewhat tighter for
several LGFVs, from banks or capital markets.
Document & : weakening the ties between local
governments and LGFVs
Document was jointly issued by the Ministry of Finance, the Development
and Reform Commission, the central bank and the Ministry of Justice and
Securities and banking regulators. It carries the same policy agenda as of Article No.
43, but stresses more on prohibiting any implicit government guarantee on LGFV
financing. It prohibits local governments from raising debt via PPP projects, pledging
future land sales into LGFVs or executing land sales to repay debt. The document
pointed out that local governments should swap their existing debt with more
transparent muni-bonds, with the additional purpose of lowering funding costs. Local
governments are urged to more thoroughly inspect financing activities and regularly
disclose their government debt information. On the other hand, LGFVs are obliged to
declare a lack of local government guarantee in writing if they plan to raise onshore
debt. Lastly, a cross-department supervisory mechanism was proposed as well, having
both fiscal and financial ministries and commissions to co-operatively supervise and
oversee local governments’ financing activities, LGFVs debt and financial institutions’
lending activities.
6
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Document No. 87 was released right after Document No. 50 by the Ministry of
Finance, for the main purpose of further regulating local government illegal
financing activities. The document prohibits local government from financing
projects through certain asset and/or service purchase routes, effectively reducing
sources of LGFVs revenues that were previously generated directly from local
governments.
New regulator appointees signaling deleveraging policy
continuity
The central government shuffled several key positions in the country’s top
regulatory authorities and expanded the scope of responsibility of such
authorities. The 13
th
National People’s Congress noted that more responsibilities
will be carried by the National Audit Office (NAO) and proposed to reform the
previously separated national and local taxation system by integrating the offices at
and below the provincial level. One of the areas specifically targets local and
regional governments through enforcement of stricter investigation of potential
LGFV financing using PPP projects.
These policy changes over the last several months, as well as slowly but surely
allowing a greater number of onshore defaults or debt-equity restructurings for
even some SOEs, aim to adjust the market’s expectations on implicit
government support for LGFVs as well as SOEs, in our view.
7
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Relative value
The China LGFV sector has typically moved on macro-headlines emerging
from China around policy changes with regards to the sector. After a decent
performance in 2017 where the sector outperformed China IG by ~10bps, the sector
has underperformed quite materially in 2018ytd, with a sharp and most prominent
widening happening in May-2018.
We attribute much of this widening to an increasing number of headlines
emerging from China, around ever-tightening policy changes on their funding
sources as well as increasing news of onshore defaults in the sector and more
broadly, in the weaker China SOE space. This should not be surprising given that the
government has been talking about higher tolerance for SOE/LGFV defaults for quite
some time now and that investors should not consider all debt issued by these entities
as being government guaranteed obligations.
Figure 2: LGFV IG vs China IG
Z-spread
Note: Prices as of May 28, 2018; Source: Bloomberg, . Morgan.
As a sector recommendation, we have been advocating an UW on LGFVs for
long time, given the lack of comfort from several of the LGFVs’ weak standalone
credit quality as well as opacity in their most of their underlying businesses. LGFVs
typically operate provincial and municipal level government projects, and the
transparency of their businesses is low and the scope of financial reporting is limited.
However, the size of the LGFV sector as a part of the JACI universe is not
negligible, and we think that especially benchmarked investors could start looking at
adding some of the credits within this space, which we think have less scope of
widening given multiple factors such as policy role importance, stable credit profile etc.
We also note that several LGFVs that have underperformed in the recent
widening are especially from lower rated provinces and mainly involved in the
infrastructure construction business. Also, LGFVs with strong / clear policy roles
(metro operators, holdco companies like Beijing State Assets) are ones which are
least affected as well, to no surprise to us.
-40
-30
-20
-10
0
10
20
30
40
50
100
120
140
160
180
200
220
240
260
280
300
Spread (RHS) JACI LGFV Z-spread JACI CN IG Z-spread
8
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Figure 3: Spread performance of LGFVs since Apr 28, 2018
Note: Prices as of May 28, 2018; Source: Bloomberg and . Morgan estimates.
(6)
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137
-20 0 20 40 60 80 100 120 140 160
BJSTAT '25
BEIJII '19
XANCON '19
TRTHK '19
YUNAEN '19
ZZCITY '19
TRTHK '21
JNXCCC '21
CSPLIN '19
BEIJII '20
YWSOAO '20
NMHIGH '20
CQLGST '21
BJSTAT '20
BJSTAT '20
BINHCO '20
ZHHFGR '20
WHMTR '19
CDCOMM '27
CQNANA '19
CONSON '20
XIHUI '19
NJYZSO '22
QDCCIZ '20
QDCCIZ '20
QDCCIZ '22
NJYZSO '27
TJNCON '19
CQNANA '26
CHDXCH '21
CHADEC '19
YUNINV '19
GSHIAV '19
XZETDZ '19
QHINVG '20
YUNAEN '19
CCUDIH '20
YUNMET '19
GXCMIN '19
CQNANA '21
QDCCIZ '25
DFINVH '19
SXROBR '19
HRINT '19
9
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Sector strategy and key recommendations
With LGFVs growing large enough to be a sub-sector in JACI, while too big to
ignore, jump-risk stays high, given the lack of information flow. Hence, we think
it makes sense to stick to LGFVs with defined/strategically important roles and
ideally having decent standalone credit profiles.
Amongst the LGFVs that we screened, given that most LGFVs are trading as a
“group” in different yield buckets, we would look to take selective exposure in
LGFVs through credits in the first two categories for each yield bucket. For exposure
to higher yields, we are more comfortable with the risk-reward and information flow
in other China SOEs and HY corporates as presented in this report.
We think those in the regional infra and construction sectors are more at risk
compared to say metro operators, public utility services (water treatment etc.) with
existing operations or some investment holdco companies that function as a key
government arm. While utility and toll-road companies have high earnings visibility,
they are also at some risk of reduced uplifts in ratings for them as well as they are
more likely to be commercial-like entities (rather than policy) in practice.
Table 2: Summary of recommendations for LGFVs and selected SOEs and corporates
Entity Issue
Bond
Structure
Bond
rating
Amt (US$
mm) Ratings Z-sprd M. Dur YTW
Guangzhou Metro GUAMET % '20 Keepwell N 200 Baa1/-/A 106 %
Tianjin Rail Transit TRTHK % '21 Keepwell N 300 Baa1/-/A 115 %
Tianjin Rail Transit TRTHK % '19 Keepwell N 200 Baa1/-/A 71 %
Beijing Infrastructure Investment BEIJII % '19 Keepwell N 300 A2/A/A+ 28 %
Beijing Infrastructure Investment BEIJII % '20 Keepwell OW 300 A2/A/A+ 76 %
Wuhan Metro Group WHMTR % '19 sr. unsec OW 290 -/-/A 126 %
Beijing State-Owned Asset Mgmt BJSTAT 3% '20 Keepwell N 300 A3/A-/A 93 %
Beijing State-Owned Asset Mgmt BJSTAT % '25 Keepwell N 700 A3/A-/A 145 %
Tianjin Binhai New Area Cons & Inv BINHCO 4% '20 sr. unsec UW 500 Baa1/BBB+/A- 167 %
Qingdao City Construction Inv Grp QDCCIZ % '25 Keepwell UW 300 -/BBB-/BBB+ 243 %
Qingdao City Construction Inv Grp QDCCIZ % '20 Keepwell N 500 -/BBB-/BBB+ 223 %
Hanrui Overseas Investment Co Ltd HRINT % '19 Keepwell UW 490 -/-/BB+ 1197 %
Jiangsu NewHeadLine NHLHK '19 Keepwell UW 300 -/BB-/BB+ 1327 %
Oriental Capital Co Ltd DFINVH '19 Keepwell NC 300 -/-/BB+ 452 %
ChemChina HAOHUA % '21s sr. unsec OW 1000 -/BBB/A- 117 %
ChemChina HAOHUA % '22s sr. unsec OW 1500 -/BBB/A- 146 %
Yanzhou Coal YZCOAL Perp 'c20 sr. unsec OW 500 Ba3/BB/B+ 330 %
Yanzhou Coal YZCOAL % ‘22 sr. unsec OW 228 Ba3/BB/B+ 407 %
Baoshan Iron & Steel BAORES % '20s Keepwell OW 500 Baa2/BBB/A 102 %
Sino-Ocean Land SINOCE % '19s sr. unsec OW 500 Baa3/-/BBB- 124 %
Shanghai Construction SHCONS % '20s sr. unsec NC 400 Baa2/BBB-/BBB+ 97 %
China Hua Neng Group HUANEN % c'22s Keepwell OW 500 -/-/- 340 %
Aluminum Corp of China CHALUM 4% '21s Keepwell OW 800 -/-/- 246 %
Central China CENCHI % '20s sr. unsec OW 386 B1/-/BB- 485 %
Fantasia Holdings FTHDGR % '19s sr. unsec NC 300 B3/-/- 577 %
ChemChina HAOHUA Perp 'c22 sr. unsec OW 600 Baa2/-/BBB+ 222 %
Power China CHPWCN Perp 'c19 sr. unsec OW 500 Baa1/-/- 128 %
MCC Holding CHMETL Perp 'c21 sr. unsec NC 500 Baa1/-/- 209 %
China Minmetal Corp. MINMET Perp 'c21 sr. unsec OW 400 Baa1/-/- 226 %
China Railway Construction RLCONS Perp 'c19 sr. unsec OW 800 A3/-/- 118 %
Power China CHPWCN Perp 'c22 sr. unsec NC 500 Baa1/-/BBB+ 230 %
Aluminum Corp of China CHALUM Perp 'c21 Keepwell N 500 -/-/BBB 232 %
FWD Ltd FWDINS Perp 'c22 AT1 NC 250 Ba2/-/BB+ 372 %
Nanyang Commercial Bank NANYAN Perp 'c22 AT1 OW 1200 Ba2/-/- 377 %
China Cinda Asset Management CCAMCL Perp 'c21 AT1 OW 3200 B1/-/- 403 %
ICBC ICBCAS Perp 'c21 AT1 OW 1000 Ba1/-/- 315 %
Note: Prices as of May 28, 2018; Source: . Morgan, Moody’s, S&P, Fitch and Bloomberg.
10
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Clearly, there are certain LGFVs that are quite wide in the 1-2yr duration bucket
which presents investors a conundrum of missing out on better yields if not invested
but having a high “jump risk” if any of these LGFVs widen materially due to
financial constraints, which are difficult to monitor given inadequate underlying
information flow. Based on the sector overview, our strategy for LGFVs is as
following:
As we have discussed in our prior reports as well, taking exposure in some
LGFVs with very definite policy-role and/or with high cash visibility such as
metro operators, toll road operators etc. would be better than infrastructure
construction companies, especially if the latter have largely under-construction
projects. We think tighter financial conditions, limited earnings visibility and
overall social impact will likely be lowest for them. Hence, most at risk to
underperform in this environment.
In terms of tenor, shorted-dated notes (preferably 1-3 years) remain
preferable vs. their longer end notes given LGFV curves are not steep enough
in an already volatile sector with limited information flow. We believe this
sector’s bond curve should be steeper as policy environment and regulations are
still evolving for the sector and hence uncertainty is relatively higher.
We would also look for similar yielding China SOEs / corps as proxies to
this space (especially in 2-3yr duration) as we think this would enable investors
to earn similar carry but with better ability to monitor risk. We do note that
except for credits where tight liquidity conditions have already started pricing in
concerns on the specific credits, most LGFVs are still at least quoted at similar
levels to the SOEs whose bonds are more liquid and investor base more diverse,
both by investor type and geographically.
11
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Figure 4: China LGFV relative value vs. China IG and HY (BBB-rated SOEs and corporates in green and LGFVs in blue)
Note: Prices as of May 28, 2018; Source: . Morgan, Bloomberg.
Select LGFVs with strong policy role
As we see from the chart above, most of the LGFVs trade in a ‘group’:
Within LGFVs, we are comfortable with bonds from Beijing State,
Wuhan Metro, Guangzhou Metro, etc. in the % bucket for 1-2yr
average life. We also place higher comfort for them over the infrastructure
construction companies with similar yields such as BINHCO, QDCCIZ etc.
We initiate with N on Beijing State-Owned Asset Management (BJSTAT)
‘20s and ‘25s. We recognize the high policy importance of BJSTAT for
Beijing municipal government to incubate investments in key industries as
well as managing stakes in key financial institutions. But our Neutral
recommendation on the 20s is on the valuation basis, which we believe is fair
but not particularly attractive as it is trading ~20bp higher than its closest peer
BEIJII ‘20s which is one notch higher in credit rating. We also recommend N
on the 25s due to fair valuation, and the longer duration indicates relatively
limited policy visibility.
BJSTAT '20
BJSTAT '25
BEIJII '19
BEIJII '20
BINHCO '20
NJYZSO '22
NJYZSO '27
TRTHK '19
CCUDIH '20
GUAMET '20
TRTHK '21
CQNANA '19
CQNANA '21
CQNANA '26
GSHIAV '19
CSPLIN '19
QDCCIZ '20
JNXCCC '21
QDCCIZ '25
XIHUI '19
CONSON '20
ZZCITY '19
GXCMIN '19
YWSOAO '20
SXROBR '19
TJNCON '19
YUNINV '19
YUNAEN '19
XZETDZ '19
YUNMET '19
XANCON '19
WHMTR '19
DFINVH '19
YUNAEN '19
CHADEC '19
ZHHFGR '20
NMHIGH '20
QDCCIZ '20
CQLGST '21
CHDXCH '21
QDCCIZ '22
CDCOMM '27
HAOHUA '21
HAOHUA '22
HAOHUA '23
CHRAIL '23
CHIOLI '19
CHIOLI '20
CHIOLI '22
CHIOLI '23
CHITRA '19
CHITRA '24
CMHI '20 CMHI '22
CRHZCH '19
MINMET '20
BAORES '20
SINOCE '19
SINOCE '24
SHCONS '20
SUNOTG '23
COSL '22
HUANEN '22
CHALUM '21
HAOHUA Perp 'c22
CHPWCN Perp 'c19
CHMETL Perp 'c21
MINMET Perp 'c21
RLCONS Perp 'c19
CHPWCN Perp 'c22
CHALUM Perp 'c21
CENCHI '20
FTHDGR '19
FWDINS Perp 'c22 NANYAN Perp 'c22
ORIEAS Perp 'c22
CCAMCL Perp 'c21
ICBCAS Perp 'c21
YZCOAL '22
YZCOAL Perp 'c20
2%
3%
4%
5%
6%
7%
8%
yield to worst
M. Dur
12
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
We initiate with OW on Wuhan Metro (WHMTR) '19s. On a relative
basis, we think the bonds look slightly attractive at only marginally inside
Tianjin Railway ‘21s (NC), which has the same credit rating but ~2 years
shorter duration. Wuhan Metro is also the sole metro operator in a first-tier
city in China, with a strategic business positioning that we have bit more
comfort with.
Looking at strategic relationships with the provincial government is key
when selecting LGFVs. For example, we would have bit more comfort
with Tianjin Binhai (BINHCO) over say Xihui Haiwai (NC), Qingdao
Conson or Yunnan Metropolitan (YUNMET, NC). While all are in
infrastructure construction business, BINHCO is the sole government
investment and financing arm for an area which gets regular grants from
central government as well. In addition, Tianjin has relatively stronger
provincial level local government finances.
We reiterate that these recommendations are for investors looking to
invest within LGFVs only as they are nevertheless still trading somewhat
close to some of the mid-tier SOEs such as China Merchant Holdings
(CMHI), ChemChina, Minmetals, Power China, China Railway
Constructions (CRCC), etc. for which we would still have relative
preference.
Upside catalysts for Wuhan Metro include higher-than-expected government
capital grants and subsidies. Downside risks include weaker economic performance
and higher indebtedness of the municipality, which may affect government support
for WHMTR.
Upside catalysts for Beijing State-owned Asset Mgmt include diversification of
investments and resulting generation of portfolio value. Downside risks include
underperformance of investment portfolio and weakening of Beijing municipal
government’s willingness to support.
Several SOE alternatives in the 4-5% range
We note that there are several LGFVs with 1-3 year duration that are yielding in the
4-5% range, which should seem attractive for an IG investor, in our view. Typically,
investors buy bonds in this tenor for their stability rather than capital appreciation
given the short tenor (even 100bp spread compression implies only here).
With this in mind, we think investing in strong SOEs even if that means going for
the callable part of the capital structure (perpetuals with high step-up), should better
qualify for the above yields vs low volatility requirements as mentioned above. We
note from the chart above that there are several such alternatives that investors could
look at.
For example, we think the following China SOE and corporate bonds are some
alternatives we think offer similar yields while information transparency around
business and outlook is much clearer and easier to monitor:
13
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
China Railway Construction perps ‘c19s: At 4%ytc for 2019 call date, the
bonds are senior unsecured in ranking and issued from A3/A- rated issuer
which is one of the largest railway infrastructure construction in China.
While the company is ~55% owned by central SASAC and is listed in
Shanghai and Hong Kong, we think the partial ownership is more due to
bringing financial discipline through listing and management appointment
and operations etc. remain closely monitored by central government through
the wholly owned China Railway Construction Corp, parent company of
CRCC. The perps have 5% step-up if not called, hence a steep incentive to
do so given the coupon will reset to ~10%.
ChemChina ‘21s: ChemChina is China’s largest chemical company and
third largest globally. As a key company in specialty chemicals, crop
protection and agro-chemicals sector, we think the company has a strategic
position in a sensitive sector for the government given the importance of
food safety and self-sufficiency for the country. In our view, this strategic
importance has further increased for the wholly central-SASAC owned
entity which also directly guarantees the bonds, post-acquisition of
Syngenta and this support is also evidenced from the US$43 billion
acquisition which has completed in the middle of an otherwise,
“deleveraging focused year” by the Chinese government. The bonds offer
~4%ytm as well, similar to the weaker LGFVs of 2020-21 maturities but in
our view, the former has much better earnings visibility, closer government
ownership structure and clear and high strategic support.
Minmetals % perps 'c21s: We also think the perps from China
Minmetals Group callable in 2021s (%ytc) are a decent alternative for
investors looking to invest in core China SOEs but yielding over 5%, as
compared to the weaker LGFVs at similar levels and duration. The SOE is
again wholly central-SASAC owned and was designated as the only State-
owned Asset Investment Platform in the M&M industry and hence in our
view, further increased in its strategic importance. Even from a bottom-up
perspective, the credit should be deleveraging especially with commodity
prices rebounding and the company’s key project in Peru (Las Bambas)
operational. The bonds are rated Baa1, have 400bp step-up if not called and
hence in our view, have high likelihood of being called.
The 6-7% club – not without risk but risk-reward wise better,
in our view
Clearly, bonds yielding over 6% for 1-2 year average life are not without higher risks
or some broad concerns. However, we think the following bonds offer a much better
risk-reward vs. some of the lower quality & rated LGFVs in the sense that they can
still be more effectively monitored.
Also, these LGFVs are typically from lower rated (weaker credit profile) provinces
and typically in infrastructure construction businesses. Consequently, either
directly or through the province, these credits are quite dependent on the
property sector themselves. Hence, we think it makes some sense to present
some HY China property credits as a decent alternative to consider, where we
are bit more comfortable with standalone business profile from default-probability
perspective.
14
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Yanzhou Coal perp ‘c20s and ‘22s: We initiate coverage on Yanzhou Coal,
its % perps ‘c20s and ‘22s with OW. The perps have a 400bp step-up (to
T3+830bp) if not called in Apr-2020 and are senior unsecured in ranking. The
outlook for coal prices is relatively better and along with continued cost
control in both China and Australian operations, the company has reduced
leverage to ~ as of Dec-17 but we expect this number to stay broadly
similar on higher capex in next 1-2 years. Yanzhou is 55% owned by
Shandong government’s wholly owned Yankuang Group and is the main
profit contributor to the SOE. While not a strong standalone credit, we think
the company still provides much better earnings visibility, has decent
operations at standalone level and being listed, investors would should be able
to monitor the company closely. Hence, we think the bonds are a decent
alternative to the higher yielding LGFVs in 2-3yr duration bucket. We would
also recommend YZCOAL perps ‘c20s over QDCCIZ ‘20s (also Shandong
province LGFV) with the former trading ~140-150bps wider to call date.
Separately, we think Yanzhou ‘22s look cheap at 7% which is wider than its
peers such as Indika ‘22s (also pure coal credit). We also note that in the lows
of coal cycle in 2015, Yanzhou was actually buying back its 2022 bonds at
around 90cents, even as other commodity credits’ bonds fell to below 50cents.
Key upside catalysts are higher coal prices, reduced capex and asset sales,
while key downside risks are a decline in coal prices, higher-than-expected
costs of production, aggressive capex etc.
NANYAN and CCAMCL AT1s (covered by Matthew Hughart): We
think the AT1s from these financial institutions offer decent yields for the
risks and though there is some call risk from them, we think it is still low. For
CCAMCL, Matthew writes in his recent note published May 3rd: “Offered at
a yield to 2021 call of %, a variety of comparisons highlight the value,
whether it is vs. AT1 peers, vs. senior bonds, or relative to the company's
Hong Kong subsidiary: we conclude that the yield supports a more positive
view.” Also, while supply remains a concern, it has been quite slow this year,
which we believe is either is a reflection of increasing pressure to manage
leverage and stick to core businesses, although it may also suggest a pick-up
in the rest of the year.
Central China % ‘20s (covered by Daniel Fan): We would recommend
this as an alternative only against the highest yielding LGFVs which are HY
rated (by Fitch only) despite getting the uplifts due to provincial government
ownership and hence having a very weak standalone profile. Also, as
mentioned above, since these LGFVs are, either directly or through the
province, quite dependent on the property sector themselves it makes some
sense to present some HY China property credits. The company has a good
track record in project execution, maintains strong liquidity and conservative
financial management. Capitaland is a strategic partner, which should ease
some concern over the less transparent JV projects. Key downside risks are
concentration in Henan and low transparency at JV level. Further catalyst is the
expansion of its asset-light project management business.
15
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Golden Eagle ‘23s: Not an ideal comp but to again exemplify our rationale,
the bonds trade about flat to some of the weaker LGFVs of this duration.
While the risks would be relatively high in both cases, we draw bit more
comfort from holding Golden Eagle at this time, given its likely bottoming
out of retail sales cycle, clear asset coverage in multiple of net debt etc.
Hence, “jump-risk” of spreads much more mitigated and investors would
have better ability to monitor the investment.
Please refer to our last published coverage report for key risks on the above
alternatives presented.
16
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
LGFVs: A quick recap
Background of LGFVs
LGFVs have special roles in supporting regional economic development but also
constitute a major portion of local government liabilities. Local government
funding vehicles (LGFVs) are a sub-group of SOEs in China, typically founded for
financing infrastructure and other regional development projects and usually do not
operate for profits. They rose to prominence in the 1990s to largely fund local
governments’ new projects. Over time though, their number grew materially with the
strategic role of keeping up with infrastructure spending to meet regional economic
growth targets. Since the 2000s, the LGFV debt market has grown at an even faster
pace given the policy support on boosting regional economies by investing
extensively in infrastructure and social welfare projects.
Table 3: Total debt as % of net assets vs LGFV outstanding amount as % of net assets (USD bn)
As of 2018YTD Total debt Total LGFV amount outstanding Total net asset
648 22 2,610
Total net asset % % %
Source: WIND. . Morgan estimates.
At the same time though, mounting debt and high leverage carried by LGFVs have
led to concerns of overleveraging which has typically been off-balance sheet so far.
While onshore bank and bond markets have been traditional sources of funding, in
recent years, a large number of LGFVs have tapped the offshore bond market as well.
As the LGFVs usually operate social welfare or infrastructure projects which do not
generate constant and immediate cash flows, government support for their operations
becomes even more critical.
Table 4: Selected provinces LGFV outstanding vs. GDP data
LGFV total outstanding
(USDmm)
2017 nominal GDP (USD
bn)
2017 real GDP growth
rate
Beijing 1600 %
Chongqing 1500 %
Gansu 500 %
Guangdong 500 %
Guangxi 300 %
Hubei 290 %
Hunan 900 %
Inner Mongolia 400 %
Jiangsu 1890 %
Jilin 400 %
Qinghai 300 %
Shaanxi 500 %
Shandong 2300 %
Shanxi 365 %
Sichuan 600 %
Tianjin 1500 %
Yunnan 1410 %
Zhejiang 500 %
Source: National Bureau of Statistics of China, WIND, . Morgan estimates.
17
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Figure 5: Selected provinces LGFV outstanding vs. GDP data
Source: National Bureau of Statistics of China, WIND, . Morgan estimates.
Fundamental analysis framework
We use a top-down approach to assess LGFVs and our selection criterion is
therefore more weighted towards its local government strength and its policy
role. Standalone credit profile of LGFVs is included as well but with relatively less
weight. We take the following listed factors into consideration when we assess
individual LGFVs:
1) Strength of the government: We think that how developed and the
resulting financial ability of local government is one of the critical factors to
be taken into consideration. LGFVs commonly have weak standalone credit
profiles, so which provincial or municipal government that is linked to them
becomes important. Although the central government has enforced strict
rules on the separation of government involvement in LGFV operations and
debt financing, we think that the linkage between the two will stay at least
for now, but will gradually towards to a much lesser extent. Also, among
different levels of governments, we think that provincial governments
are usually stronger than municipal or district level governments. In
terms of the strength of shareholder structure, we prefer those that are
directly owned by central SASACs.
2) Willingness of government support: We would consider lowering weight
on this factor eventually given the ongoing reform to eliminate government
implicit support for LGFVs. However, in the near term, we still include it as
an important part to be considered. Currently, the majority of the existing
LGFVs run social and public mandates and projects for their respective
local governments and carry policy mandate. In our view, this factor plays a
differentiated role for LGFVs that operate on a policy basis versus for
commercial purpose, with the former receiving more government support.
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LGFV total outstanding (USDmm) Nominal GDP (USD bn) Real GDP growth rate 2017
18
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
3) Standalone credit profile: Given the current trend of policy tightening, we
do recognize that LGFVs standalone profiles will become more important
for assessment going forward as government guarantee is prohibited. But
for now, we think that the above factors will still be dominating in our
analysis while the standalone profile plays a relatively smaller role.
For more details on the framework, please see our report dated Aug 3, 2016.
Categorization of LGFVs
We determine categorization of the LGFVs based on the following factors, of which
the first two should determine the government’s willingness to support, while the
latter two will determine the ability.
Strategic or policy role they play
Economic importance in terms of scale and contribution to provincial economy
Standalone fundamentals (relatively less important, in our view)
Provincial government’s financials (ability to support)
Based on the above four factors, we classify the LGFVs into four broad categories –
Preferred: LGFVs with a clear and defined strategic / policy role within the
province that owns the credit. The LGFV should manage socially important
projects, are typically sole vehicles to operate in their sector/segment and largely
operational. Hence, any liquidity pressure disrupting smooth operations would
have large socio-economic impact. Underlying operations would be strong but
financials may not be, more due to government-mandated reasons (ticket price
controls, regulated-tariffs). We believe the above factors would most likely
ensure that the government would support through either equity infusion, asset
sales or subsidy contribution would remain even in stressed periods. Also, we
note that these LGFVs are usually from top-tier provinces/cities in China.
Some comfort: LGFVs with a defined strategic role and again have a dominant,
if not a monopolistic position in that sector within the province, even though the
operations may be in relatively less strategic sectors. The province should
typically be relatively strong as well. If not the above, then they would operate
projects that are typically more profitable, such as highway and toll roads
business and hence are generally strong at a standalone level. This also means
they are subject to less government support as they operate relatively more
commercial projects but being fundamentally strong, the likelihood of requiring
parental support would also be limited.
Opportunistic: LGFVs with lesser certain or no material policy role, in a less
strategic sector such as mining, infrastructure construction and property
development etc. but has a dominant or major market share in the sector /
segment it operates in. Also, the province would typically be in the tier 2 or 3
range. The reason this is labeled as opportunistic is while there would be limited
social impact in a stressed situation and hence less certain of support in the
medium term depending on government’s priority projects. However, since the
LGFV would be one of the very few companies implementing the projects for
the province, support in near term at least should be there.
19
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Uncertain: The LGFVs in this category typically manage cyclical projects
which have low to medium socio-economic impact in the near to medium term
and without much visibility in its recurring cash flows. Also, several of these
credits would have large scale greenfield projects that could keep funding
requirement high and hence have most uncertainty in terms of sustained liquidity.
Most of them would be from weaker provinces/cities and the operations tend to
concentrate in certain area/region. Many infrastructure construction businesses
fall into this category, which usually have volatile cash flows due to the nature
of the business.
Table 5: Summary of LGFV categorization
Preferred Some comfort Opportunistic Uncertain / Negative
Policy/strategic role √ ↔ X X
Dominant market position √ √ √ ↔
Standalone credit profile X ↔ ↔ X
Provincial strength ↔ √ ↔ ↔
LGFVs Beijing Infrastructure Tianjin Binhai Yunnan Investment Group Hanrui Overseas Investment
Beijing State-owned AM Tianjin Infrastructure Yunnan Energy Investment Huai'an Development Holdings
Wuhan Metro Qingdao City Construction Yunnan Metropolitan Xuzhou Eco Tech Dev Zone
Tianjin Railway Transit Chang Development Int’l Nanjing Yang Zi State-owned Changsha Pilot Investment
Guangzhou Metro Xi'an Municipal Infrastructure Jinan West City Investment
Gansu Prov. Highway Aviation Xihui Haiwai Investment
Chongqing Nan'an Urban Qingdao Conson Development
Zhuzhou City Construction Guangxi Comm. Inv. Group
Yiwu State-Owned Capital
Shanxi Road & Bridge Constr.
Qinghai Provincial Invt Group
Oriental Capital Company
Changde Urban Construction
Inner Mongolia HG Highway
Chongqing W. Modern Logistics
Chengdu Comm. Investment
Chengdu Xingcheng
Zhuhai Huafa Group
Hanrui Overseas Investment
Huai'an Development Holdings
Xuzhou Eco Tech Dev Zone
Changsha Pilot Investment
Notes: √ means is a required factor in the credit, X implies the factor is typically not present for the credit. ↔ means the factor could be present but to a lesser degree, in a credit in this sector.
Source: Moody’s, S&P, Fitch, Company reports, . Morgan.
20
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Technicals: Less negative due to lower
supply but investor base still narrow
LGFV bonds’ representation in JACI has increased sharply over the years.
LGFVs as a portion of the JACI index have grown over time. As of April-2018,
LGFV market capitalization as a component of the JACI grew 17% from 2017 year-
end, totaling around US$21 billion and now represent about % of the JACI, hence
similar to China IG property, Korea or Singapore IG corporates while being bigger
than India and Indonesian HY corporate segments.
Figure 6: LGFV as % of JACI
Source: Bloomberg, Bond Radar, . Morgan estimates.
LGFV US$ issuance reached its peak level of US$ billion in 2016 after
gradually increasing the measure since 2013. The previously heavy LGFV
issuance could be attributed to regional economic stimulus packages usually in the
form of infrastructure and PPP projects, relatively lower offshore yields as well as
“reputation factor” of being able to access the offshore bond markets.
Rising interest rates in offshore markets could have played a role as well. While
onshore rates were rising for most of 2017, USD yields for Chinese issuers including
LGFVs had been fairly stable during the period. But after accounting for cross
currency swap rates, effective yields of USD bonds in CNY terms were still
relatively more attractive. Hence on the demand side, we saw continued participation
from investors (largely Chinese investors who had set up offshore offices) looking
for USD assets and had prior investment experience / exposure to the credits in the
onshore markets.
%
%
%
%
%
%
%
%
%
%
%
%
2014 2015 2016 2017 2018YTD
21
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Bond supply should slow going forward
Figure 7: Onshore LGFV bond issuances
US$ in billions
Source: WIND and . Morgan.
Figure 8: Offshore LGFV issuances
US$ in billions
Source: Bloomberg, Bond Radar, . Morgan.
LGFV offshore issuance dropped in 2017 after experiencing consecutive growth
since 2014, as the central government started addressing local indebtedness issues,
total amount of LGFV offshore issuance started to decline. This was not surprising
and can be partly explained by China’s policy shift to eliminate local governments’
role in both LGFV financing and operations.
Figure 9: Yield basis between China AAA-rated 5yr bonds and JACI China IG corporates
Source: WIND, Bloomberg and . Morgan.
Also, the basis between onshore/offshore yields has narrowed again in recent months
in addition to the USD appreciating vs most EM countries including CNY.
Further, Chinese investors who we think has been the dominant buyers of these
bonds have been noticeably cautious in adding exposure to the sector in the recent
months.
Last but not least, as mentioned in the policy update section above, the government is
tightening the underwriting standards whereby state-owned financial institutions
should not indicate implicit or direct local government support by reporting local
government financials. Implemented in a stringent manner, we believe tighter
standards should impose more challenges for LGFVs to tap for more funding going
forward and should also imply lower overall supply in the USD bond markets.
153
170
312
291
379
290
145
0
100
200
300
400
2012 2013 2014 2015 2016 2017 2018
Onshore LGFV issuance
-
2
4
6
8
10
12
2014 2015 2016 2017 Apr-18
Offshore LGFV issuance
0
20
40
60
80
100
120
140
160
May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18
Basis China corporate bond AAA 5-year ytm JACI China IG ytw
22
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Investor base remains narrow as Asia continues to
dominate
The trend of investors in Asia being the most active buyers continues. In the past
year, Asian investors (in which we think Chinese investors who have had existing
investment experience with LGFVs in the onshore markets) continued to dominate
the buying activities of offshore LGFV bonds.
While we did see some allocation increase to European investors in 2017, we
attribute this more to allocating some weight to a sector that is reaching a reasonable
representation scale. We also think the inclination has been more towards better
quality / rated LGFVs rather than a wide comfort in taking substantial exposure into
the space. Net-net, we think that regional investors in Asia would still hold most of
the LGFVs outstanding.
The above argument can be further exemplified by looking at the investor type, who
participated in the LGFV new issuances. Asset managers (48%) and banks (29%) are
still the two largest types of investors. Again, we believe the banks involved are
largely offshore branches of the Chinese banks who have existing relationship or
exposure with the LGFVs even in the onshore markets while asset managers would
include JACI-benchmarked investors who had to increasingly participate in some of
the LGFVs as it became a material enough part of the index. Interestingly, private
bank investors took only 9% of the otherwise “yieldy” LGFV new issuances.
Figure 10: Asia investors were the dominant buyers of LGFVs bonds
with limited participation by European and . accounts
Source: Bloomberg, Bond Radar, . Morgan.
Figure 11: Asset managers and banks are the largest buyers,
followed by insurance/pension funds
Source: Bloomberg, Bond Radar, . Morgan.
The overall trend of investors by region and by type has not seen major changes
over time, as the financial opaqueness of LGFVs and their weak standalone credit
profiles are inherently less compelling for offshore investors with limited information
flow to track the investments.
0% 0% 0% 2%
19% 10% 4%
12%
82%
90% 96%
86%
0%
20%
40%
60%
80%
100%
2014 2015 2016 2017
US Europe Asia
12%
29%
48%
9%
2%
Insurance / pension funds Bank
Asset managers Private bank & Retail
Others
23
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 6: China LGFV offshore USD issuance summary
Issuer Ticker Issue date Amt Maturity Province* Municipality Coupon Mdy S&P Fitch Onshore
Bj State-Owned Ast Hk Co BJSTAT 5/26/2015 300 5/26/2020 Beijing Beijing 3% A3 A- A AAA
Bj State-Owned Ast Hk Co BJSTAT 5/26/2015 700 5/26/2025 Beijing Beijing % A3 A- A AAA
Eastern Creation Invest BEIJII 3/20/2014 300 3/20/2019 Beijing Beijing % A2 A A+ AAA
Eastern Creation Ii Inve BEIJII 11/20/2014 300 1/20/2020 Beijing Beijing % A2 A A+ AAA
Zhaohai Investment Bvi BINHCO 7/23/2015 500 7/23/2020 Tianjin Tianjin 4% Baa1 BBB+ A- AAA
Nanjing Yang Zi State-Ow NJYZSO 12/5/2017 300 12/5/2022 Jiangsu Nanjing % Baa1 BBB+ A- AAA
Nanjing Yang Zi State-Ow NJYZSO 12/5/2017 200 12/5/2027 Jiangsu Nanjing % Baa1 BBB+ A- AAA
Rail Transit Intl Invst TRTHK 5/13/2016 200 5/13/2019 Tianjin Tianjin % Baa1 - A AAA
Chang Development Int CCUDIH 1/20/2017 400 1/20/2020 Jilin Changchun % Baa1 - - AAA
Gz Mtr Fin Bvi GUAMET 12/3/2015 200 12/3/2020 Guangdong Guangzhou % Baa1 - A AAA
Rail Transit Intl Invst TRTHK 5/13/2016 300 5/13/2021 Tianjin Tianjin % Baa1 - A AAA
Chongqing Nanan Con Dev CQNANA 7/19/2016 300 7/19/2019 Chongqing Chongqing % - BBB+ BBB+ AA+
Chongqing Nanan Con Dev CQNANA 7/19/2016 500 7/19/2021 Chongqing Chongqing % - BBB+ BBB+ AA+
Chongqing Nanan Con Dev CQNANA 8/17/2016 200 8/17/2026 Chongqing Chongqing % - BBB+ BBB+ AA+
Gansu Highway Aviation GSHIAV 11/18/2016 500 11/18/2019 Gansu N/A 3% - BBB- BBB- *+ AAA
Changsha Pilot Inv Hld CSPLIN 12/2/2016 350 12/2/2019 Hunan Changsha % - BBB- BBB- AA+
Hongkong Intl Qingdao QDCCIZ 2/12/2015 500 2/12/2020 Shandong Qingdao % - BBB- BBB+ AAA
Jinan West City Invt JNXCCC 10/11/2016 300 10/11/2021 Shandong Jinan % - BBB- BBB AAA
Hongkong Intl Qingdao QDCCIZ 2/12/2015 300 2/12/2025 Shandong Qingdao % - BBB- BBB+ AAA
Xihui Haiwai I Invst XIHUI 6/27/2016 300 6/27/2019 Jiangsu Wuxi % - BBB BBB+ N/A
Haitian Bvi Int Invst CONSON 12/12/2017 400 12/12/2020 Shandong Qingdao % - BBB BBB+ AAA
Zhuzhou City Constructio ZZCITY 10/19/2016 300 10/19/2019 Hunan Zhuzhou % Baa3 - BBB- AA+
Guangxi Comm Invest Gr GXCMIN 11/3/2016 300 11/4/2019 Guangxi N/A 3% Baa3 - BBB AA+
Chouzhou Intl Inv Ltd YWSOAO 12/5/2017 500 12/5/2020 Zhejiang Yiwu 4% Baa3 - BBB AA+
Shanxi Road&Brdg Contr SXROBR 11/4/2016 365 11/4/2019 Shanxi N/A % - BB- - AAA
Qinghai Invest Group QHINVG 2/22/2017 300 2/22/2020 Qinghai N/A % - BB- - AA
Tianjin City Constructio TJNCON 6/15/2016 500 6/15/2019 Tianjin Tianjin % - A- A AAA
Yunnan Inv Hldings Group YUNINV 4/1/2016 300 4/1/2019 Yunnan N/A % - - BBB+ AAA
Yunnan Energy Invst Fin YUNAEN 4/26/2016 300 4/26/2019 Yunnan N/A 3% - - BBB AAA
Xz Eco Tech Dev Zone Int XZETDZ 6/16/2016 300 6/16/2019 Jiangsu Xuzhou % - - BB+ *- AA
Hanrui Overseas Invst HRINT 6/28/2016 490 6/28/2019 Jiangsu Zhenjiang % - - BB+ *- AA+
Caiyun Intl Investment YUNMET 7/12/2016 500 7/12/2019 Yunnan N/A % - - BBB+ AAA
Xian Construction Invest XANCON 9/13/2016 500 9/13/2019 Shaanxi Xi'an % - - BBB N/A
Wuhan Metro WHMTR 11/8/2016 290 11/8/2019 Hubei Wuhan % - - A AAA
Oriental Capital Co Ltd DFINVH 11/22/2016 300 11/22/2019 Jiangsu Yancheng % - - BB+ *- AA
Yunnan Energy Inst Ovr YUNAEN 12/13/2016 310 12/13/2019 Yunnan N/A % - - BBB AAA
Changde City Cons Inv CHADEC 12/15/2016 250 12/15/2019 Hunan Changde % - - BBB- AAA
Huaxing Investment Holdi ZHHFGR 1/26/2017 300 1/26/2020 Guangdong Zhuhai % - - BBB AA+
Inner Mongolia Highway C NMHIGH 12/5/2017 400 12/4/2020 Inn. Mong. N/A % - - BBB- *- AA+
Hongkong Intl Qingdao QDCCIZ 12/4/2017 300 12/4/2020 Shandong Qingdao % - - BBB+ AAA
Cq Logistics Deve Cons CQLGST 9/6/2016 500 9/6/2021 Chongqing Chongqing % - - BBB AA+
Chengdu Xingcheng Inv CHDXCH 11/29/2016 300 11/29/2021 Sichuan Chengdu % - - BBB+ AA+
Hongkong Intl Qingdao QDCCIZ 12/4/2017 500 12/4/2022 Shandong Qingdao % - - BBB+ AAA
Chengdu Comm Invst Group CDCOMM 12/13/2017 300 12/13/2027 Sichuan Chengdu % - - BBB+ AAA
Source: Bloomberg, Bond Radar, . Morgan.
*Beijing, Tianjing, Chongqing are provincial-level municipalities
24
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Background of Individual LGFVs
Table 7: Background of LGFVs
Bond issuer
Beijing Infra Inv
Tianjin Infrastructure
Construction Tianjin Railway Transit Tianjin Binhai
Ticker BEIJII '19s, '20s TJNCON '19 TRTHK '19, TRTHK '21 BINHCO '20s
Bond structure Keepwell Guarantee Keepwell Keepwell
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings A2/A/A+ -/A-/A A3/-/A Baa1e/BBB+/A-
Issuer rating A1/A+/A+ -/A-/A A2/-/A A3/A-/A-
Standalone rtgs baa2/bb- bb- ba3/-/BB b2/b+
Notches 4/8 6 6-7 7-8
Govt ownership 100% 100% 100% 100%
Shareholder structure 100% owned by Beijing municipal
government
100% owned by Tianjin Municipal
Government
86% owned by Tianjin
Infrastructure Const.& Invt and
14%
owned by Tianjin TEDA
Investment Holdings, which is
wholly owned by the SASAC of
Tianjin Municipal Government
100% owned by Tianjin SASAC,
directly supervised by district-level
Binhai govt
Main business and
market position
Construction, investment,
financing and operation of the
subway system in Beijing,
operates 15 out of 18 of Beijing's
urban transit system; primary land
and property development along
rail lines
Transportation E&C projects in
Tianjin, operates over
86% of city’s toll roads; holds
% of Tianjin Railway;
dominant player in Tianjin's water
treatment market through listed
sub Tianjin Capital Environmental
Protection Group, which supplies
60% of water to Tianjin
Mandated by Tianjin govt to
construct, own
and operate rail transportation
assets; also holds Tianjin govt's
minority investments in national
rail lines and engages in
metro-related businesses,
including infrastructure
construction, property
development and leasing along its
metro lines
Various infrastructure including
70% of road network in the New
Area, railways, tunnels, and
bridges, etc., also engaged in
water treatment, waste disposal,
primary land dev, social housing,
civil projects, materials trading,
financial service, etc.
Shareholder strength Beijing as the capital has high
political and economic
prominence, though credit/GDP is
much higher than national
average at 349%
Tianjin is relatively strong among
provincial-level local govts, per
capita GDP was highest in China
for 2014, GDP growth is higher
than average at % for 2015,
land sale reliance low, fiscal
deficit/GDP moderate, though
Debt/GDP higher than average at
188%
Parent Tianjin Infrastructure
Construction & Investment is
largest non-financial SOE under
Tianjin
Tianjin is relatively strong among
provincial-level local govts, per
capita GDP was highest in China
for 2014, GDP growth is higher
than average at % for 2015,
land sale reliance low, fiscal
deficit/GDP moderate, though
Debt/GDP higher than average at
188%
Linkage and
importance to parent
Very High ( annual
grants 2013-2035, execute Beijing
govt's urban rail policy, subsidy to
cover operating loss from low
fare)
High (sole platform for developing
and operating infrastructure
projects in central urban area,
strong govt control and oversight.
RMB77bn allocated for 2012-
2015, RMB20bn capital injection
expected for 2016, 25% of debt
accounted as government related
debt in 2015, per S&P.)
High(sole builder and operator of
urban rail transport in the central
area of Tianjin; No less than
RMB10bn/year grant 2015
onwards, on-going fare subsidies
from Tianjin govt)
High (strong oversight, sole govt
investment and financing platform
for Binhai New Area development,
grant totaled RMB1bn for 2012-
2014, cash injections
2006-2012, land injections, letter
of support for financing)
Strategic / Policy role Very-high (key public
transportation provider of capital
city, high likelihood of central govt
stepping in if needed)
High (Sole platform for developing
and operating infrastructure
projects in central urban area,
important role in executing the
national strategy of integrating
Beijing-Tianjin-Hebei provinces,
policy role of key subs including
metro, water treatment, etc.)
Very high (the sole builder and
operator of urban rail transport in
the central area of Tianjin, a
municipality directly owned by the
central govt; metro projects are
approved by the central
government)
High (sole govt investment and
financing platform for Binhai New
Area development, part of national
goal of integrating Beijing, Tianjin,
Hebei, high-tech and free-trade
zone, component of 'one-belt one-
road', grant from central govt)
Economic importance High (any disruption of metro
would likely to severely impact the
local economy)
Very High (the company is the
largest non-financial SOE by
assets under Tianjin)
High (any disruption of metro
would likely to severely impact the
local economy)
High (the New Area contributed
56%/30% of GDP and govt
revenue of Tianjin, TBCI is one of
the largest SOEs for Tianjin)
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan.
25
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 8: Background of LGFVs (continued)
Bond issuer
Yunnan Investment Group
Yunnan Energy Investment
Overseas Finance Company
Yunnan Metropolitan
Construction Investment Group
Chongqing Nan'an Urban
Construction & Development
Ticker YUNINV '19 YUNAEN '19s YUNMET '19 CQNANA '19, CQNANA '21
Bond structure
Directly issued by YIG Keepwell Guarantee
Issued directly by Chongqing
Nan'an Urban Construction &
Development
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings -/-/BBB+ -/-/BBB -/-/BBB+ -/BBB+/BBB+
Issuer ratings -/-/BBB+ -/-/BBB -/-/BBB+ -/BBB+/BBB+
Standalone rtgs -/-/B -/-/B- NA -/B/-
Notches 6 7 NA 7
Govt. ownership 100% 100% 100% 100%
Shareholder structure 100% owned by Yunnan
provincial gov't
YEIG is indirectly % owned
and ultimately controlled by the
Yunnan SASAC
100% ultimately owned by
Yunnan Province gov't; %
directly owned by Yunnan
Construction Engineering Group;
govt plans to transfer 40% of
shareholding to Yunnan Shengyi
Investment Co
90% owned by Chongqing Nan'an
District Department of Finance;
10% owned by China
Development Bank, which is
100% govt-owned
Main business and
market position
Provincial investment holdco with
diversified industries via subs,
including hydro, railway, finance,
tourism, infrastructure and social
projects. Yunnan Energy
Investment is largest sub and
contributes majority of gross
profits to YIG
The company engages in the
investment and management of
energy, natural gas, and coal
energy businesses worldwide.
The company is also involved in
the investment and management
of energy and energy related
industries
Commercial property, urban
development (convention
centres), sole partner with govt
with land reserve function, water
treatment, tourism infrastructure,
healthcare, etc.
Construction and financing
for urban infrastructure and land
development (80%
revenue);supply-chain finance to
other SOEs and SMEs in the
electronics information industry
Shareholder strength Yunnan is western province with
relatively low GDP and per capital
GDP, govt debt/GDP is above
average at 48%, fiscal
deficit/GDP also slightly higher
than average; it has fiscal transfer
of RMB291bn from central gov't
Yunnan is western province with
relatively low GDP and per capital
GDP, govt debt/GDP is above
average at 48%, fiscal
deficit/GDP also slightly higher
than average; it has fiscal transfer
of RMB291bn from central gov't
Yunnan is western province with
relatively low GDP and per capital
GDP, govt debt/GDP is above
average at 48%, fiscal
deficit/GDP also slightly higher
than average; it has fiscal transfer
of RMB291bn from central gov't
Chongqing is one of the four
central govt directly owned
municipalities and its GRP per
capital growth ranking 10th in
China, though with higher-than-
average credit/GDP of 178%;
Nan'an District is one of the main
downtown districts of Chongqing
with 8th GDP rank among districts
Linkage and
importance to parent
High - YIG is the largest
investment holding platform under
Yunnan provincial govt, engaged
in diversified industries including
high policy role industries .
hydro, infrastructure, railway.)
High - Sole energy platform;
hydropower is the key focus of
energy development for the
province, ranks 2nd among
Chinese provinces in terms of
hydro resources.
High- Sole provincial-level
platform for large infrastructure
development;
manages large-scale urban
infrastructure, social housing
projects and the province’s
Tourism resources.
Med-High - amongst the
important SOEs in Nan'an for
financing and investing in key
infrastructure projects and land
development, and funding local
SOEs and SMEs.
Strategic / Policy role High – Key investment holding
platform, holds key energy
subsidiary YUNAEN and railway
sub Yunnan Provincial Railway.
Strategic role could decline if key
subs are deconsolidated
High - Assigned the role of
mandated provincial SOE to
develop the province's natural-
gas market and power-distribution
grid, holds some of province’s
hydro power assets
Medium - Some businesses have
important policy role, . urban
and tourism infrastructure, water
treatment land reserve,
healthcare
High - Executes the government's
urbanization plan for the
Chongqing Nan'an district
Economic importance High - holding important subs
such as Yunnan Energy
Investment
Medium-high - Largest SOE in
province by assets but role of
energy security is bit weaker
relative to others
Medium - Decent profit
contribution from urban
development, tourism, and water
treatment
Medium - constrained by
city/district-level operation
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan.
26
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 9: Background of LGFVs (continued)
Bond issuer
Guangzhou Metro Hanrui Overseas Investment Huai'an Development Holdings Xuzhou Eco Tech Dev Zone
Ticker GUAMET '20s HRINT '19 HUAHK '19 XZETDZ '19
Bond structure
Keepwell + RMB SBLC Keepwell Keepwell Guarantee
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings A3/-/A -/-/BB+ -/-/BB+ -/-/BB+
Issuer ratings) A2/-/A -/-/BB+ -/-/BB+ -/-/BB+
Standalone rtgs baa1 NA NA NA
Notches 2 NA NA NA
Govt. ownership 100% 100% 100% 100%
Main business and
market position
Construct and operate
Guangzhou's metro system, 45%
market share in passenger
transport sector of Guangzhou;
also property dev along metro
lines, consultancy for metro
operations across China, renting
underground advertising and
other commercial space
Hanrui is responsible for urban
development and social welfare
in the zone through construction
of
infrastructure and social housing
Urban and infrastructure
development in the technology
development and economic zone
The company has been
designated to develop large-
scale urban infrastructure
projects in Xuzhou Economic
Technology Zone, provide
ancillary services
and promote investment in the
zone
Shareholder
structure
100% owned by Guangzhou
SASAC, one of four first-tier
cities in China
100% owned by Zhenjiang
SASAC
100% owned by Huai'an
municipality
100% owned by Xuzhou
Municipal Government
Shareholder
strength
Guangzhou is Guangdong
province’s capital, amongst the
highest in credit quality provinces
with high GDP and fiscal
revenue, per capita GDP, healthy
fiscal balance, and moderate
debt/GDP
Zhenjiang has relatively low GDP
and per capita GDP in Jiangsu
(rank 10th out of 13). Jiangsu has
relatively healthy GDP size and
growth, and fiscal status, though
credit/GDP at 141%;
Huai'an municipality of Jiangsu
Province; Jiangsu has relatively
healthy GDP size and growth,
etc. though credit/GDP at 141%;
Huai'an has relatively low GDP
and per capita GDP in Jiangsu
(rank 11th out of 13)
Xuzhou municipality of Jiangsu
Province; Xuzhou has relatively
high GDP and per capita GDP in
Jiangsu (rank 5th out of 13)
Linkage and
importance to
parent
High, one of four quasi-public
welfare enterprises under the
Guangzhou SASAC, Guangzhou
Municipal govt commits at least
RMB10bn/year for capex and
interest expenses, over 80%
debts were reported as govt debt
in 2014
High (only gov't-linked entity in
the Zhenjiang New Zone to
promote economic development
of Zhenjiang; govt support via
capital injections, subsidies and
payment of related interest
expense and rebate of land
development cost, etc.)
High (the sole investment and
financing platform in the
municipal government's flagship
economic and technology
development zone, on-going
capital injections and subsidies)
High (strong government control
and oversight, on-going subsidy
and injections, policy role of
infrastructure construction in the
zone)
Strategic / Policy
role
Very High, executes local
government's urban transit
policy, one of the largest mass
transit enterprises in China
Medium (only gov't-linked entity
in the Zhenjiang New Zone to
promote economic development
of Zhenjiang)
Medium (the company has been
designated to develop large-
scale urban infrastructure
projects in the zone)
Medium (one of the urban
development companies in
Xuzhou Municipality and is the
sole investment and financing
platform in the municipal
government's flagship economic
and technology development
zone)
Economic
importance
High (any disruption to metro
services would likely result in
severe negative effects on local
economy)
Medium (constrained by small
size and city/district-level
operation)
Medium (constrained by small
size and city/district-level
operation)
Medium (constrained by small
size and city/district-level
operation)
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan.
27
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 10: Background of LGFVs (continued)
Bond issuer Beijing State-owned Asset
Management Co.
Nanjing Yang Zi State-owned
Investment Group
Chang Development
International Limited
Gansu Provincial Highway
Aviation Tourism Investment
Group Co.
Ticker BJSTAT '20s, '25s NJYZSO '22s, '27s CCUDIH '20s GSHIAV '19s
Bond structure
Keepwell Directly issued by NYSI Guaranteed by CCDG Directly issued by GHAT
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings A3/A-/A Baa1/BBB+/A- Baa1/-/- -/BBB-/BBB-
Issuer ratings) A2/A/A Baa1/BBB+/A- Baa1/-/- -/BBB-/BBB-
Standalone rtgs Baa3/BB/- B1/B/- Baa3/-/- /BB+/B-
Notches 4/6 6-7 2 1/6
Govt ownership 100% 100% 100% 100%
Shareholder
structure
100% owned by Beijing SASAC 100% owned by Nanjing
Municipal Government through
Dept of Jiangbei New Area
Administrative Committee
100% owned by Changchun
SASAC
100% owned by Gansu SASAC
Main business and
market position
Investment holdco involved in
financial services, environmental
protection, modern manufacturing
and technology, culture, tourism
etc. diverse businesses. Has
clear mandate from government
for its role within these sectors
Responsible for public
construction works including
infrastructure, public housing and
primary land development,
industrial park management and
being the utilities provider in the
new area
The company develops key
infrastructure projects, including
land-development to building
affordable public housing and
providing water supply and
sewage treatment
The Company builds and
operates toll-road projects,
tourism and financial services
etc.
Shareholder
strength
Beijing as the capital has high
political and economic
prominence, though credit/GDP is
much higher than national
average at 349%
Nanjing is the capital and semi-
provincial level city of Jiangsu
province, and has one of the
higher GDPs per capita among
semi-provincial cities and stable
economic growth; Nanjing's GDP
per capita ranks 3 out of 13 in
Jiangsu province
Changchun is the capital and the
largest city of Jilin Province, an
upper tier province itself.
Changchun is an important
industrial base with a focus on
automobile sector, has GRP
growth rate of 8% for 1H17 amid
economic rebalancing and a
national revitalization program
Gansu is a province in northwest
China, and has relatively small
GDP which ranks 23rd out of 31
mainland China provinces. In the
central government's 13th Five-
Year Plan for 2016-2020, Gansu
aims to position as China's
western transportation hub
Linkage and
importance to
parent
High - BSAM supports Beijing's
economic development, and
undertakes political and social
responsibilities; received over
RMB11 billion in equity infusion
from government and mandated
to execute several high profile
govt projects including Olympics)
High - Flagship LGFV platform
with clear policy role to develop
Jiangbei New Area in Nanjing
and redevelopment program in
Nanjing city. One of largest
LGFV in Nanjing.
High - CCDG is Changchun’s
largest SOE, key utility company
for government and monopoly
position in water and sewage
treatment in the city. Receives
regular government grants.
High - Sole road infra developer
the province and also manages
and operates key scenic areas
on behalf of the provincial
government; increasingly
important as the province
becomes a key part of China's
the Belt and Road initiative)
Strategic / Policy
role
Very High - policy goals and run a
portfolio including healthcare,
technology, property
development, finance, sports and
manufacturing etc., holds stakes
in key Beijing financial institutions
Medium - Jiangbei New Area is
the only state-level new area in
Jiangsu. Social role currently is
bit limited as developing new
area.
High – The credit is present in
strategic public utilities which
serve an essential social role.
Policy role for companies in this
sector with dominant market
share becomes critical
Medium - transportation
infrastructure construction
business is not critically strategic
although they typically have high
earnings visibility.
Economic
importance
High - runs key industrials
projects, supports urban
development and manages
assets in industries of Beijing
Medium - The new area is
expected to be the main growth
engine for Nanjing but only in
medium to long term
High - Largest local SOE and
hence decent economic
importance
Medium - one of largest LGFV in
province, this is however offset
by ~30x net leverage and hence
high state dependence
Index eligibility JACI JACI JACI JACI
Source: S&P, Moody's, Fitch, . Morgan.
28
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 11: Background of LGFVs (continued)
Bond issuer
Changsha Pilot Investment
Holding Co.
Jinan West City Investment &
Development Group
Xihui Haiwai Investment
Holdings Co.
Qingdao Conson Development
Group Co.
Ticker CSPLIN '19s JNXCCC '21s XIHUI '19s CONSON '20s
Bond structure
Directly issued by Changsha
Pilot Directly issued by JWC Keepwell Guaranteed by Qingdao Conson
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings -/BBB-/BBB- -/BBB-/BBB -/BBB/BBB+ -/BBB/BBB+
Issuer ratings) -/BBB-/BBB- -/BBB-/BBB -/BBB/BBB+ -/BBB/BBB+
Standalone rtgs /BB-/- /B/- /B/- /B/B
Notches 3 5 6 6/7
Govt. ownership 100% 100% 100% 100%
Shareholder
structure
100% owned by Changsha
SASAC
100% owned by Jinan SASAC 100% owned by Wuxi Municipal
Government
100% owned by Qingdao
Municipal Government
Main business and
market position
Primarily involved in land and
property development urban
development projects etc. Also
provides financing services but
land development is majority of
revenues.
Largely in infrastructure
construction projects, housing
construction, municipal
infrastructure construction,
tourism development, leasing
and property management, hotel
management, and oil business
Wuxi Construction engages in
property development and
management activities.
Mandated by government to
develop roads, bridges, sewage
treatment plants etc.
Provides financial investment
services including securities,
asset management, small loans,
guarantees, and equity
industries. Also invests in real
estate, infrastructure
construction, tourism, hotels
Shareholder
strength
Changsha is the capital and most
populous city of Hunan province;
Changsha has healthy GDP
growth and strong fiscal income,
supported by diversified and well-
developed industries
Jinan is the provincial capital of
Shandong, the third largest
economy in terms of gross
regional product (GRP). The
municipal economy is largely
driven by tertiary industries such
as tourism and logistics
Wuxi is a city in Jiangsu
province, which has relatively
healthy GDP size and growth
and is one of the strongest
economic regions in terms of
GRP
Qingdao municipality is a semi-
provincial-level city, located in
China's Shandong Province.
Qingdao's GRP ranks 12th out of
the country's over 300 cities. The
municipality has a healthy fiscal
performance and diversified
socio-economic profile
Linkage and
importance to
parent
High - major local government
financing vehicle in Hunan
Xiangjiang New Area that carries
out the government's strategic
development plans for the area)
High (Was largest SOE, now the
key subsidiary of the largest
SOE, integration of JWC with the
municipal budget; strategic
importance of JWC's public-
sector business to the
municipality)
High (The keepwell provider
(Wuxi Construction) is wholly
owned by Wuxi government and
reports to Wuxi Department of
Finance; it has received
CNY18bn in capital injection
since establishment)
High (the government flagship
investment entity and is also
Qingdao's major primary land
developer and financial service
platform)
Strategic / Policy
role
Low - Business limited to
property development in
Xiangjiang New District. Hence,
not a very strategic role in our
view although it has exclusive
development rights.
Medium - Businesses in less
critical sectors and has limited
geographical scale but large
current operations which
increase social importance.
Medium - WCDI is Wuxi's major
urban public infrastructure
development and investment
platform and plays an important
role in implementing Wuxi's
blueprint of urban development
Medium - The company is wholly
owned by the government and
develops the municipality's public
infrastructure and has been
assigned a number of important
urban infrastructure projects,
including Qingdao Jiaozhou Bay
Tunnel)
Economic
importance
Low (constrained by the
concentration of business in a
small area in Changsha). Also,
govt reimburses full development
costs and 60% of profits so
dependence is high
High - Largest LGFV group in
Jinan by assets after
reorganization along with its
parents JNUCG). Very weak
standalone financials, though
Medium - Majority of assets are
government projects and
receives financing plan etc.
needs provincial government
approval first
Medium - Second largest of three
funding platforms for Qingdao
government. Standalone profile
is weak though. Also Qingdao
government has bit weaker
provincial credit profile
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan.
29
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 12: Background of LGFVs (continued)
Bond issuer
Zhuzhou City Construction
Development Group
Guangxi Communications
Investment Group Co.
Yiwu State-Owned Capital
Operation Co
Shanxi Road & Bridge
Construction Group
Ticker ZZCITY '19s GXCMIN '19s YWSOAO '20s SXROBR '19s
Bond structure
Directly issued by ZCCD Directly issued by GCI Guaranteed by YWSCOC Directly issued by SRBC
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings Baa3/-/BBB- Baa3/-/BBB Baa3/-/BBB -/BB-/-
Issuer ratings) Baa3/-/BBB- Baa3/-/BBB Baa3/-/BBB -/BB-/-
Standalone rtgs B1/-/B B1/-/- Ba3/-/- -/B/-
Notches 4/5 4 3 2
Govt. ownership 100% 100% 100% 100%
Shareholder
structure
100% owned by Zhuzhou
Municipal Government
100% owned by Guangxi SASAC 100% owned by Yiwu SASAC 100% owned by Shanxi SASAC
Main business and
market position
Essential public services where it
has monopoly position in most
sectors it is present in, including
water supply and sewage
treatment plants, city gas
distribution, public transport etc.
The company engages in the
construction, operation,
maintenance and toll collection of
roads and facilities. It is also
involved in the investment and
management of real estate; and
financial industry, logistic,
resource development, road,
energy, municipal infrastructure,
and construction projects
Primarily real estate
development. It also operates in
market management,
merchandising, passenger
transportation, warehousing and
logistics, water, infrastructure,
hotel service, exhibition and
advertising, and other business
segments
The company provides a
comprehensive selection of
services related to the
investment, construction, and
operation of expressways
Shareholder
strength
Zhuzhou City is Hunan’s second
largest city and part of the
ChangZhuTan Golden Triangle;
Zhuzhou continues to report
stable budget performance and
benefits from a diversified socio-
economic profile. Its GRP per
capita remains above that of
Hunan Province and national avg
Guangxi is the only provincial
government in the China Western
Development plan with a
coastline and seaports, making it
a key import-export gate for west
China. It also benefits from
favorable central government
policies, including ASEAN–China
Free Trade Area
Yiwu is a county-level local and
regional government (LRG)
region, known for commodity
trading incl. wholesale markets.
Economic strength was ranked
6th out of over 2,800 county-level
LRGs in China, per an affiliate of
the China Ministry of Industry
and Information
Shanxi province is located in
North China and it is less
developed due to geographic
limits in its participation in trade.
Industries in Shanxi is centered
around heavy industries such as
coal and chemical production
Linkage and
importance to
parent
High – implements mainly non
commercially viable and public
utility projects; largest SOE in
Zhuzhou city, almost 50% of its
assets.
High - GCI is responsible for
operating around 70% of the toll
roads within Guangxi Province
High - YWSCOC is the sole
platform in Yiwu and
consolidates its major state
owned operational assets.
Sectors such as infrastructure
construction, water supply,
property redevelopment etc.
Medium – An important (not sole)
toll road developer and operator
Shanxi. It has a policy role and
social responsibility to provide an
essential public good in Shanxi
Strategic / Policy
role
High - primary vehicle in urban
planning, infra and construction
etc). Receives financial support
from got budget allocation
through regular grants and cash
infusion. Most of debt reclassified
as govt debt in 2014’s debt swap
program.
High - sole SOE for developing
the province’s expressways for a
landlocked province in SW
China. GCI is responsible for
operating around 70% of the toll
roads within Guangxi,
contributing largely to the land
connectivity of the region
High - infrastructure construction,
resettlement housing, water
supply, sewage treatment, food
reserves and forest preservation;
also designated to operate state-
owned assets, including
wholesale trading marts, public
transportation and an inland port
Low - Toll road financing and
highway bridge construction
business is bit more commercial
in our view and hence not as
critical as businesses of some
other LGFVs here.
Economic
importance
High - ZCCD is the primary
investment and financing vehicle
of Zhuzhou City, largest SOE
accounting for 50% of its
Zhuzhou SASAC’s assets
High (one of the largest SOEs in
Guangxi by assets and the sole
SOE in Guangxi that is
responsible for developing the
province's expressway network)
Medium- Main arm to provide
Yiwu's public-sector services and
receive monetary and non-
monetary support from Yiwu
Municipal Government
Medium - a market leader in
provincial toll road and highway
construction, having its strong
track record of handling 70% of
Shanxi’s toll road projects
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan
30
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 13: Background of LGFVs (continued)
Bond issuer
Qinghai Provincial Investment
Group
Xi'an Municipal Infrastructure
Construction Investment
Group Corp.
Wuhan Metro Group
Oriental Capital Company
Limited
Ticker QHINVG '20s XANCON '19s WHMTR '19s DFINVH '19s
Bond structure
Directly issued by QPIG Directly issued by XICI Directly issued by WMG Keepwell
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings -/BB-/- -/-/BBB A3/-/A -/-/BB+
Issuer ratings) -/BB-/- -/-/BBB A3/-/A -/-/BB+
Standalone rtgs -/B-/- NA Ba3/-/- -/-/B
Notches 3 NA 6 4
Govt. ownership 100% 100% 100% 100%
Shareholder
structure
Qinghai SAAC & Western Mining
Group own % of QPIG.
100% owned by Xi'an Municipal
Government
100% owned by Wuhan SASAC 100% owned by Yancheng
Municipal Government
Main business and
market position
The company operates as an
integrated aluminum producer,
capacity. Also has
power plant. Bu high cost
of production, not fully integrated.
The company is a utility
company, selling piped natural
gas to residential and non-
residential users; constructs
natural gas pipelines and
facilities; and constructs and
operates gas stations.
The company constructs,
operates, and manages rail
transit. It is also involved in land
reserve, property development,
resource management, and
financing activities
The company offers
infrastructure and housing
construction services. Also
manages parks and commercial
real estate operations, property
leasing, protection of housing
construction, O&M of
infrastructure and municipal
utilities projects
Shareholder
strength
Qinghai province is a tier-1 local
government under China's
administrative
division hierarchy; its economic
profile is relatively weak (rank
18th among 31 provincial
economies in GDP per capita)
Xi'an is the capital of Shaanxi
Province and the largest city
within the province in terms of
population and economy; GRP of
Xi'an made up 33% of the
province's and it was well above
national growth in the past few
years
Wuhan ranks amongst the top-10
Chinese cities by GRP; has
strong fiscal performance, a
diversified socioeconomic profile
and a strategic location as being
in central China
Yancheng is ranked 7th out of 13
cities by GRP, in Jiangsu.
Linkage and
importance to
parent
Low – The company is a
relatively small aluminum
producer with management
appointed by govt but should be
a small company for the province
given its scale. Is not very
profitable too.
Medium - Dominates the markets
for gas, heat, public
transportation in Xi'an and city’s
budget integrates the company’s
financials. Had its debt replaced
by government debt in debt-swap
program in 2016
High – Is registered as local SOE
under Chinese company law.
Sole metro operator and
executes urban transportation
policy.
High – Yancheng Oriental is
largest LGFV in the city for infra
& property development etc. Also
has the Sino-Korea Industrial
Park, established under a Sino-
Korea FTA.
Strategic / Policy
role
Low –aluminum production is not
in a sensitive or strategically
important sector, in our view.
Low - leading distributor of piped
gas in Xi'an, a business which we
think can be easily replicated by
private players and hence is not
too strategic in nature
Very High – As sole metro
operator in Wuhan, it is one of
the core SOEs in Wuhan, in our
view. Managed appointed by
government, strong oversight
and receives regular capital
injections from govt
Medium – involved in infra and
development projects and hence
is a somewhat strategic LGFV
but the sector is more of medium
strategic importance in our view
Economic
importance
Low - small scale of operation,
limited product and geographic
diversity, not very profitable and
hence limited contribution to
province
Medium – Xi’an’s largest public
sector entity and the primary
public service provider in Xi'an,
controls ~75% of supply, ~30% of
gas stations, 70% of public
transportation
High (any disruption of metro
would likely to severely impact
the local economy)
Low – With 60% of revenues are
generated by govt itself,
economic importance seems low.
Receives capital injections from
government though, very weak
financials
Index eligibility JACI JACI JACI JACI
Source: Moody's, S&P and Fitch, . Morgan.
31
Asia Pacific Credit Research
04 June 2018
Varun Ahuja, CFA
(852) 2800 6038
@
Tiantian Teng
(852) 2800-7024
@
Table 14: Background of LGFVs (continued)
Bond issuer
Qingdao City Construction
Investment Group
Changde Urban Construction
Investment Group Co.
Zhuhai Huafa Group
Inner Mongolia High-Grade
Highway
Ticker QDCCIZ '20s, '22s, '25s CHADEC '19s ZHHFGR '20s NMHIGH '20s
Bond structure Keepwell+USD SBLC Directly issued by CUCI Guaranteed by Zhuhai Huafa Directly issued by IMHCD
Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured
Bond ratings -/-/BBB+ -/-/BBB- -/-/BBB -/-/BBB-
Issuer ratings) -/-/BBB+ -/-/BBB- -/-/BBB -/-/BBB-
Standalone rtgs NA -/-/B NA NA
Notches NA 5 NA NA
Govt. ownership 100% 100% 100% 100%
Shareholder
structure
100% owned by Qingdao
Municipal Government
100% owned by Changde
SASAC
100% owned by Zhuhai SASAC 100% owned by Inner Mongolia
Autonomous Region Government
Main business and
market position
The company engages in the
construction and development of
urban and rural projects. The
company is also involved in the
municipal engineering; civil air
defense development and
operation; and real estate
development and management
and asset management
businesses, as well as provides
funds for foreign investment
Urban and affordable housing
construction, infra, land
consolidation and development,
upstream and downstream
industry chain management as
well as construction of roads,
bridges, and parks etc.
The company engages in urban
operations, real estate
development and trade logistics
etc. The company’s operations
include urban renewal projects
and infrastructure facilities, port
investments and construction of
housing projects; and real estate
activities comprise residential
and affordable housing
development etc.
The company engages in the
operation and management of
highways in the region, also
finances key road construction
projects on behalf of the
government
Shareholder
strength
Qingdao is Shandong’s largest
city, has solid budgetary
performance, decent fiscal
flexibility due to its special status
that grants it provincial-level
economic management authority
Changde is the third-largest
economy in Hunan province in
terms of GRP and ranks among
the first quartile of all China's
prefecture-level cities. Changde's
GRP growth outperformed the
provincial and national average,
while its budgetary performance
improved over the years
Zhuhai municipality has average
budgetary financials but is
relatively small in size. Also,
there are contingent liabilities
from its state-owned entities, per
Fitch which could increase
leverage
Inner Mongolia is positioned as
a strong industrial hub in
northern China, mining (coal, iron
ore, rare earth) are key
resources along with wind
energy. Ranked 16th out of 31
provinces
Linkage and
importance to
parent
High - QCCI is the 2nd largest
SOE in Qingdao, plays an
important role in implementing
the infra construction, property
development, waste water
management, tourism, financial
services.
Medium – Primary land
developer in and around the city.
Implements the city’s blueprint
plans for urban planning and
muni development
Medium – Not sole player but
plays an important role in
implementing urban development
projects. Also owns majority of
Zhuhai Financial Inv - a key
holdco for other SOE
subsidiaries.
High – Sole SOE responsible for
development of the region’s
highway network. Company
operates key regional highways,
roads and as financing vehicle
for road construction
Strategic / Policy
role
Medium - QCCI serves as a key
urban infrastructure investment
company for Qingdao
Municipality and carries out
state-owned asset management.
While has some public utility
businesses, primary business is
more commercial in nature
Low – While a key player in land
development, we see the scope
as bit more limited compared to
other LGFVs that we discuss
here
Low-Medium – One of the (not
sole) developers of new projects
limits the scope of policy role but
investment arm for ownership in
other FIs and industrials
increases is slightly
Medium – Similar to Shanxi
Road, operating key highways
and roads is not very critical from
social role perspective.
Nevertheless, is a sole SOE
doing this and hence policy role
is not low as well
Economic
importance
Medium – Asset size as % of
total assets is relatively low
compared to the core LGFVs
Medium – Since it is the
government arm for urban
construction, main profit
c
