OREANDA-NEWS. Fitch Ratings has published China-based toll-road operator Shenzhen Expressway Company Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB'. The Outlook is Stable.

Shenzhen Expressway is 50.9% owned by Shenzhen International Holdings Limited (SIH, BBB/Stable), which is in turn 43.89% owned by Shenzhen State-owned Assets Supervision and Administration Commission (SASAC). Shenzhen Expressway's robust toll-road operations and its balance sheet quality are the key supports for its 'BBB' IDR. Traffic growth has been robust in the past five years, even though its operations are concentrated in Shenzhen. The strong financial profile and expected stability in the regulatory environment also underpin the company's 'BBB' rating. Fitch views the company's recent forays into the property market as broadly neutral to its credit profile and we believe the company is not likely to aggressively expand its non-toll road operations.

KEY RATING DRIVERS

Robust Regional Expressway Operator: The company is Shenzhen city's leading expressway operator with a total of 16 expressway and bridge assets that have equity-based mileage of 413 kilometres (JVs and associates included). Eight of these expressways are within Shenzhen and account for a majority of the city's expressways by mileage. The company recorded average annual traffic growth of 8.8% in the last five years and Fitch expects growth to continue to be driven by the region's diverse economy and increasing vehicle ownership in the area it operates in. However, we expect some pressure on revenue in the short term with the reduction in the share of traffic from heavy commercial vehicles, which pay higher tolls than passenger vehicles, amid the slowing economy.

Strong Financial Profile: Shenzhen Expressway's investment-grade financial profile is largely supported by stable toll income, which accounts for over 80% of its total revenue. Fitch expects the company to be near free cash flow neutral over the next three to four years, despite the large capex that may be needed for the Shenzhen outer ring road project and Meilin Checkpoint Urban Renewable (MCUR) Project. Revenue and profit of the toll road operations fell slightly in 1H15, due to the change in traffic mix. However, Fitch expects Shenzhen Expressway to be able to maintain an EBITDA margin of around 70% (74% in 2014) and forecasts its FFO fixed-charge coverage and FFO-adjusted net leverage to improve slightly from 3.7x and 3.5x respectively at end-2014in the next three to four years.

Stable Regulatory Environment: The regulatory environment for the expressway operators in China has become more stable after significant toll-road tariff standard cuts and policies that reduced revenue, such as Toll-Free Scheme on Holidays and Green Passage Toll-Free Policy (toll exemption for certain food transporting vehicles), came into effect in the last four to five years. Those changes, which discouraged private-sector expressway investment, and the traffic congestion on main expressways during holidays, are likely to deter regulators from making further changes that are adverse for the operators.

Limited Downside from Property: The company has participated in several property investment projects related to its expressway operations, including the MCUR Project and Guilong Project. In Fitch's view, these two projects are opportunistic; furthermore, because the company could acquire the land at a significant discount to the market price, these projects should have limited downside risks. We do not expect the company to aggressively expand its non-toll road operations in the future.

KEY ASSUMPTIIONS

Fitch's key assumptions within our rating case for the issuer include:
- Traffic volume to grow by 5% a year through the next three to four years
- Average toll per vehicle to drop 12% in 2015 and 5% in 2016 due to change in traffic mix
- Annual capex of CNY700m-CNY1bn in the next three to four years
- Fitch has not incorporated any profits from property segment

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Sustained improvement of the company's financing profile, with FFO interest coverage above 6.0x (3.7x at end-2014) and FFO-adjusted net leverage below 2.0x (3.5x at end-2014), provided its majority shareholder SIH's ratings also improve

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained weakening of financing profile, with FFO interest coverage below 3x (3.7x at end-2014) and FFO-adjusted net leverage above 4.5x (3.5x at end-2014).
- Material negative regulatory change in the expressway sector that would substantially weakens the company's cash generation
- Repeated engagement in property projects that would compromise the company's current business model
- A lowering of ratings of SIH