OREANDA-NEWS. The expressways acquisition proposed by the Shenzhen government has no immediate impact on the credit ratings of Shenzhen Expressway Company Limited (SZE, BBB/Stable) and its majority shareholder, Shenzhen International Holdings Limited (SIH, BBB/Stable). However, a continuation of such measures by regional governments could cause uncertainties about the longer-term risk profiles of expressway operators in China.

On 30 November 2015, SZE announced a revised proposal with the Shenzhen government on its three assets - Nanguang Expressway, Yanba Expressway and Yanpai Expressway. These expressways accounted for 18% of the company's equity-based mileage or 21% of total net profit attributable to shareholders in 9M15 (around CNY160m). The government has proposed to make these three assets toll-free from 2016 to 2018; in return, a service charge of CNY2.0bn would be paid to SZE with adjustments based on actual traffic volumes.

In addition, the government would make another upfront payment of CNY4.6bn to SZE as a base compensation for either continuously hiring SZE as the operator after 2018 and waive toll fees until the expressways have reached their respective expiry year of their concessions from 2026-2035 or a complete buyout of the assets. Before end-2018, the government will decide to pay SZE an additional CNY3.1bn (to be adjusted based on traffic volumes during 2016 to 2018) for SZE remaining the operator of the expressways or an additional CNY1.1bn for the buyout.

The immediate impact to SZE's credit profile is neutral, as SZE will have guaranteed cash receipts from the Shenzhen government. SZE will aim to use the majority of the proceeds to invest in expressway assets to maintain its scale over time. However, Fitch sees longer-term risks for SZE's credit profile. Although SZE would still be considerably larger than its peer Yuexiu Transport Infrastructure (BBB-/Stable) in terms of yearly traffic even if the three expressways are disposed, this is the second acquisition proposal to SZE by the Shenzhen government after Meilin Expressway was purchased from the company in 2014.

It is not clear if the Shenzhen government will continue to acquire other expressways. While companies have been adequately compensated for toll-waivers and assets buy-backs by provincial governments, such measures can impact the long-term credit profiles of companies depending on how the affected companies utilise such cash proceeds, and the quality and risks associated with new investments made.

We continue to expect SZE to maintain an EBITDA margin of around 70% (74% in 2014) and forecast its FFO fixed-charge coverage and FFO-adjusted net leverage to improve from 3.7x and 3.5x respectively at end-2014 in the next three to four years. SZE's financial profile remains robust for its 'BBB' ratings.

Fitch does not expect SIH's financial profile to be immediately affected either, as SZE can maintain a stable dividend policy in the medium term. SIH's ratings are based on the combined risk profile of SZE's toll-road operations and the logistics business at SIH, with a single-notch uplift for implied support from its 43.9% shareholder, the Shenzhen government. We also do not envisage any near-term changes to SIH's relationship with the Shenzhen government or expectations of support to the company.