OREANDA-NEWS. September 14, 2015. Fitch Ratings has assigned Power Construction Corporation of China (PCCC) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'A-' with a Stable Outlook, and senior unsecured rating of 'A-'.

PCCC is rated on a top-down approach as detailed in Fitch's Parent and Subsidiary Linkage rating criteria. Fitch has notched the IDR two levels below China's Long-Term IDR of 'A+' to reflect PCCC's strong operational and strategic ties with the central government through its 100% parent, the State-owned Assets Supervision and Administration Commission (SASAC). The Stable Outlook reflects Fitch's expectation that PCCC's operations will remain stable, and the government will continue to support PCCC.

KEY RATING DRIVERS

Strategic Importance to Government: PCCC's strong strategic and operational ties with the state are reflected in its leading position in China's clean energy engineering and construction (E&C) market, including a dominant position in the hydro power E&C and wind power engineering sectors. PCCC has an 80% share in the hydro power engineering market and 65% in the hydro power construction market by new contract value in China. In addition, it has 50% share of wind power engineering by new contract value in China.

State Support for Clean Energy: China aims to increase the share of clean energy in its power generation capacity to nearly 40% in 2020 from 33% in 2014. The state has been promoting the construction of hydro power plants, which account for 68% of China's clean energy generation capacity, and wind power plants, which account for 22%. In addition, China supports small hydro power E&C projects in rural regions to improve living conditions as set out in the country's 12th Five-Year Plan.

Leader in Hydro Power Construction: PCCC also makes a significant contribution to China's national planning and compilation of industry standards for the clean energy market, particularly in hydro power and wind power. It has participated in several key national hydro power and hydraulic projects, such as the Three Gorges Dam project and the Xiaolangdi Dam project.

High Profitability Offsets High Leverage: Hydro power projects have longer contract lead times and higher capital requirements, but come with higher profit margins. PCCC reported operating EBITDA margin of 10% in 2014 compared to the industry average of 4% in China. Its FFO-adjusted net leverage was 4.3x at end-2014. Going forward, we expect the company's leverage to continue to increase, primarily due to high working capital and capital expenditure.

Healthy Liquidity: PCCC had total cash available of CNY62bn at end-2014 compared with short-term debt of CNY26bn. In addition, the company has CNY417.6bn in available unused banking facilities and has access to various funding channels, including local bank borrowings and bond markets as well as the overseas bond market.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Annual installed hydro power and thermal power capacity in China to be in line with the targets set out in the 12th Five-Year Plan
- Company's market position in China remains stable
- Development of build-transfer and build-operate-transfer projects at a stable pace
- Profitability in line with historical average

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the Chinese sovereign
- Sustained weakening of the relative importance of hydraulic and hydro power E&C segment within PCCC