OREANDA-NEWS. Fitch Ratings has affirmed China-based Shenzhen International Holdings Limited's (SIH) Long-Term Issuer Default Rating (IDR) at 'BBB' with Stable Outlook. SIH is a medium-sized infrastructure company with exposures to toll-road operations and logistics businesses. The company is also a passive, minority investor in Shenzhen Airlines.

SIH's IDR of 'BBB' reflects the combined credit profile from the toll-road operations and the logistics business at 'BBB-', with a single-notch uplift for implied support from its 43.9% shareholder, the Shenzhen municipal government.

The robust toll-road operation, mostly at its 50.9% owned Shenzhen Expressway Company Limited, enjoyed healthy growth in the recent years and continues to be the major cash flow contributor to the group. The logistics business, which SIH directly controls and which is likely to be the company's main growth driver, has a relatively higher risk profile. The company has some exposure in property development, including the Meilin Checkpoint Urban Renewable Project and Guilong Project, and this is likely to be credit neutral as long as SIH does not actively or repeatedly engage in this business in the future.

KEY RATING DRIVERS
Robust Toll-Road Operations: The toll-road operations continue to be SIH's key contributor. In 2014, expressway operations accounted for around 70%-80% of SIH's consolidated funds flow from operations (FFO). The segment's revenue rose by 8.8% in 2014 due to traffic volume growth, a trend that continued into the first quarter of 2015. Fitch believes cash generation from the expressway operations will continue to be strong, driven by economic and vehicle ownership growth in Shenzhen and the surrounding areas. In addition, the regulatory environment for expressway operators has become stable, and material negative regulatory changes are unlikely in near term.

Low Leverage at SIH Level: Fitch estimates that over 60% of SIH's consolidated cash flow is generated by its key toll-road subsidiary, Shenzhen Expressway, whose operation and financial management are fairly independent of SIH. Shenzhen Expressway pays out substantial dividends to SIH and its other shareholders. However, the large cash leakage is mitigated by the very low leverage at the SIH level. At end-2014, the net leverage at the SIH level was less than 1x.

Growth and Risk from Logistics: SIH currently operates six logistics centres and one port, apart from its toll-road operation. The logistics business's EBITDA rose 21% in 2014 to HKD490m. Fitch expects that logistics will be the major growth driver for SIH in the medium term despite its current limited scale. The company will develop 18 to 22 new integrated logistics hubs across China by 2020, with first of these in Shenyang to become operational in 2015. The logistics business has a limited scale and there is uncertainty over the execution of the expansion plan, which results in a higher risk profile compared with the toll-road business.

Limited Downside from Property: Fitch has noticed SIH's participation in several property investments including the Meilin Checkpoint Urban Renewable Project and Guilong Project. However, Fitch views these two projects as by-products of its toll-road operations, and because SIH can acquire the land at a significant discount to the market price, the downside risk is rather limited.

Support from Shenzhen Government: SIH has received tangible support from the Shenzhen State-owned Assets Supervision and Administration Commission in the past, including a capital injection with the conversion of HKD1.7bn of convertible notes into SIH equity in 2010 and the extension of the maturity of a CNY863m shareholder loan in 2008. Fitch has limited the rating uplift to one notch because SIH is operated largely as a commercial entity, which is reflected in its robust 'BBB-' standalone rating, and is less reliant on state support than a typical government policy vehicle.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- Annual traffic growth across all expressways of around 5% in the next four years;
- Average toll standard level to remain stable since 2014;
- 51% equity in United Land (Meilin Checkpoint Urban Renewal Project) to be disposed after 2016;
- Annual capex in the range of CNY4bn-7bn mainly for logistics, Shenzhen Outer Ring Project and Meilin Checkpoint Urban Renewal Project;
- Dividend payout ratio to be stable at around 30%.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Successful execution of SIH's expansion strategy for the logistics business provided SIH's consolidated financial profile remains in line with Fitch's expectation
-Improvement of the credit profile of Shenzhen Expressway, which will be evident in Shenzhen Expressway's FFO interest coverage rising above 6.0x (3.7x end-2014) and its funds from operations (FFO)-adjusted net leverage falling below 2.0x (3.5x end-2014) on a sustained basis,
- Positive free cash flows at the SIH level, provided there is no material increase in business risk from its non-toll-road operations
- Strengthening of linkages between SIH and the Shenzhen municipal government.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Material weakening in the operating or financial risk profile of SIH, such as large debt-funded investments in businesses of a higher risk profile than its established expressway operations, reflected in SIH's consolidated FFO-adjusted net leverage rising above 5x (end-2014: 2.2x)
- Material adverse development at Shenzhen Expressway that would impact SIH's ability to access operating cash flows - such as tighter debt covenants at the project level
- Weakening of linkages between SIH and the Shenzhen municipal government

Definitions of financial metrics at the SIH level:
Free cash flow at the SIH level: Cash generated by directly controlled businesses, including dividends received, dividends paid and capex.
Net debt at the SIH level: SIH's consolidated net debt, excluding Shenzhen Expressway's net debt.
Net leverage at the SIH level: Net debt at the SIH level divided by SIH's consolidated EBITDA, excluding Shenzhen Expressway' EBITDA but including its dividend to SIH.