Moody’s Investors Service has upgraded the port operator and container manufacturer China Merchants Holdings International’s (CMHI) issuer and senior unsecured debt ratings to Baa1 from Baa2, with a stable rating outlook, on expectations that CMHI will receive financial support from its parent, China Merchants Group Limited (CMG), in case of financial distress.
CMHI, 54.2% owned by CMG, is strategically important to CMG as the listed flagship of the group’s transportation and infrastructure segment which is a core business within CMG. It is also an important company to expand CMG’s business to overseas markets, according to Moody’s.
CMHI’s fundamental credit profile reflects its leading position as China’s largest port operator in terms of container throughput, Moody’s says. It is also underpinned by the company’s well-diversified portfolio, the strategic locations and strong market share of its key ports, and its well-established operating track record.
On the other hand, its fundamental credit profile is constrained by the company’s weak control over its minority-owned port investments that collectively become an important source of cash flow. Its increased level of capital expenditure for the development of overseas projects and the related higher operational risk also increase financial and business risks, according to Moody’s.
The stable rating outlook reflects Moody’s expectation that over the next 12-18 months, CMHI will maintain stable operations and continue to adopt prudent financial management in acquisitions and expansion.
CMHI maintains an adequate liquidity position. Its cash position of HKD 9.5 billion at end-December 2014 covered its short term debt of HKD 6.8 billion.
The ratings would be subject to upward pressure if CMHI maintains its profitability and its financial discipline in managing its investments, such that FFO/debt trends above 20% and FFO interest trends above 4.5x on a sustained basis.
Downward pressure on the ratings would stem from a substantial deterioration of CMHI’s profitability or its adjusted debt position, and/or if it engages in material debt-funded acquisitions, such that FFO/debt falls below 15%, and/or FFO interest coverage drops below 3.5x on a sustained basis.
A reduction of ownership by CMG would also be negative for the ratings.
CMHI is the largest public port operators in China in terms of container throughput, with a market share of roughly 33%.