OREANDA-NEWS. Fitch Ratings has assigned China Railway XunJie Co. Limited's (Xunjie) USD500m 3.25% notes due 2026 a final rating of 'A-'.

The notes are to be issued by XunJie, and unconditionally and irrevocably guaranteed by China Railway Group Limited (CRG; A-/Stable). XunJie is an indirect wholly owned subsidiary of CRG. The notes are rated at the same level as CRG's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 14 July 2016.

KEY RATING DRIVERS

Top-Down Approach: CRG is rated on a top-down approach as detailed in Fitch's Parent and Subsidiary Linkage rating criteria. Fitch has notched the Issuer Default Rating two levels below China's Long-Term Issuer Default Rating of 'A+' to reflect CRG's strong operational and strategic ties with the central government through its 54.39% parent, China Railway Engineering Corporation (CREC). The latter is 100% owned by the State-owned Assets Supervision and Administration Commission (SASAC).

Secure Market Position: Fitch believes the government-granted duopoly market structure in railway construction will continue supporting CRG's leading market position. The government strictly monitors the segment, from budgeting, ordering and quality to licenses, creating a high entry barrier for other players. In addition, CRG also has the largest market share (50%-60%) of China urban rail construction, thanks to its technical strength in design and tunnelling.

Supports China National Policy: Railway construction plays an important role in China's geopolitical relationships. CRG is frequently used in China's foreign policy. CRG has taken on the majority of the construction, design and research work for railway projects in the Chinese government's "One Belt One Road" initiative, in which China invests in infrastructure projects across Asia, Europe and East Africa.

Solid New Contract Growth: Thanks to a pick-up in property investments and resilient infrastructure investment nation-wide, CRG's new contracts increased 21% yoy in 1Q16 to CNY189bn. New orders in the property sector increased by 29.8% yoy and that in the infrastructure sector rose by 16.0%.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

- new contract and revenue growth remaining stable in 2016-2018

- steady EBITDA margin for the construction operation

- annual capex of around CNY10bn in 2016-2018

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- positive rating action on the Chinese sovereign

- strengthening linkages between CRG and CREC

- strengthening linkages between CREC and the Chinese sovereign

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- negative rating action on the Chinese sovereign

- weakening linkages between CRG and CREC

- weakening linkages between CREC and the Chinese sovereign

For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 26 November 2015:

Positive

- Increased evidence that the economy can adjust smoothly while rebalancing without experiencing a disruptive "hard landing"

- Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability

- Widespread adoption of the renminbi as a reserve currency globally

Negative

- A sharper growth slowdown than currently anticipated, leading to a materialisation of risks to financial and/or social stability

- A rise in estimated general government indebtedness well above Fitch's current estimate

- Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability

- A change in policy direction that signalled decreased willingness to tackle the economy's imbalances and vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment