OREANDA-NEWS.  Fitch Ratings has assigned Zhuhai Huafa Group Co., Ltd. (Zhuhai Huafa) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BBB' with a Stable Outlook. The company is closely involved with urban planning and development.

Fitch has also assigned a 'BBB(EXP)' expected rating to a proposed Chinese yuan-denominated senior unsecured bond to be issued by Huarui Investment Holding Company Limited (Huarui). Huarui is an indirect wholly owned subsidiary of China-based Zhuhai Huafa. The bond will be unconditionally and irrevocably guaranteed by Zhuhai Huafa.

The guaranteed bonds constitute direct, unconditional, unsubordinated and unsecured obligations of Huarui, and will rank pari passu with other present and future unsecured and unsubordinated obligations. The bond proceeds will be used for general corporate purposes.

The bond is rated at the same level as Zhuhai Huafa's IDR because the direct guarantee structure transfers the ultimate responsibility of payment to Zhuhai Huafa.

The final rating on the bond is contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS
Links to Zhuhai Municipality: Zhuhai Huafa's ratings are credit linked to Zhuhai Municipality. This is reflected in the municipality's 100% ownership, strong municipal oversight of its financials, and the strategic importance of Zhuhai Huafa's public sector business to the municipality. Fitch believes these factors result in a high certainty of extraordinary support from the municipality, if needed.

The proposed bond could be structurally subordinated, in the event of Zhuhai Huafa becoming insolvent, since 66% of the issuer's existing debt is secured by assets and rights for the benefit of existing creditors. However, Fitch's believes the recoverability is not a key rating driver to determine the bond rating, as the very high likelihood of extraordinary support from the Zhuhai municipal government mitigates the potential subordination of cash flows.

Zhuhai's Solid Creditworthiness: Zhuhai Municipality has a satisfactory budget performance, diversified socio-economic profile, and strategic importance as highlighted by its inclusion in several national-level economic zones - such as the Zhuhai Free Trade Zone and China (Guangdong) Pilot Free-Trade Zone. The strengths are partially offset by Zhuhai's relatively small economic size, contingent liabilities arising from its state-owned entities, and the municipal government's high reliance on land sales for revenue.

Strategic Importance: Zhuhai Huafa plays an important role in implementing government's blueprint for urban planning and development. It plays a major part in assisting the municipality to develop large-scale urban-development projects such as the Shizimen Central Business District (SCBD) and subsidised housing projects. Zhuhai Huafa also owns majority stakes in Zhuhai Financial Investment, a key municipality-owned investment holding company that has stakes in financial institutions and industrial equity investment.

Tight Control and Supervision: The Zhuhai municipal government has the final say on the company's major investment and financing decisions, and has appointed most of the directors on Zhuhai Huafa's board. The company's financing plan and indebtedness are also closely monitored by the municipality. Zhuhai Huafa is also required to report its operational and financial results to the municipality on a regular basis.

Close Government Integration: Zhuhai Huafa has received CNY12bn in capital from Zhuhai municipal government since 2010 to support its operations in urban infrastructure development. In addition, Zhuhai Huafa is authorised by the municipal government to conduct the primary land development in some key areas in the municipality, including SCBD. The rights to primary land development are one way in which the municipal government indirectly supports Zhuhai Huafa's revenue.

Rapid Expansion: An ambitious expansion in various businesses has increased Zhuhai Huafa's execution risk and financial burden. Its property business also exposes the company to cyclical fluctuations and sector volatility, although the impact is limited because Zhuhai Huafa owns less than a quarter of its listed property arm.

RATING SENSITIVITIES
Rating Upgrade: An upgrade of Fitch's credit view on Zhuhai Municipality, as well as a stronger or more explicit support commitment from the municipality, may trigger positive rating action on Zhuhai Huafa.

Rating Downgrade: Significant weakening of Zhuhai Huafa's strategic importance to the municipality, dilution of the municipality's shareholding, and/or reduced explicit and implicit municipality support, may result in a downgrade. A downgrade could also result from the municipality's weaker fiscal performance or increased indebtedness, leading to deterioration in its creditworthiness.