OREANDA-NEWS. Fitch Ratings has affirmed China Communications Construction Company Limited's (CCCC) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating of 'A-'. The Outlook on the IDR is Stable.

In line with the top-down approach in its Parent and Subsidiary Linkage rating criteria, Fitch has notched the IDR two levels below China's Long-Term IDR of 'A+' with Stable Outlook to reflect CCCC's strong operational and strategic ties with the Chinese government through its 63.83% parent, China Communications Construction Group (CCCG). The latter is 100% owned by the State-owned Assets Supervision and Administration Commission (SASAC). CCCC accounts for almost all of CCCG's assets and revenue. The Stable Outlook reflects Fitch's expectation of continued state support for CCCC.

KEY RATING DRIVERS

Strategic Position Unchanged: CCCC has maintained its monopoly position in China's maritime engineering and construction (E&C) field in 2015 by accounting for 95% of the market by revenue. In addition, CCCC is strategically important to the Chinese government's push to strengthen China's competitiveness in global E&C markets. CCCC is one of the largest participants in China's One-Belt One-Road (OBOR) foreign policy initiative with 18.2% of the company's revenue coming from overseas operations in 1H15. The company is also a strategic vehicle used by the government in its transportation development plans. It is China's largest planner and designer of roads and bridges and a major participant in planning and setting E&C standards for China's national highway system.

Profitability Steady in Weak Market: CCCC's value of new contracts declined by 6% in 1H15 due to weaker demand, compared with the 10% growth in 2014. However, the company was able to report EBITDA growth of 1% and maintain its EBITDA margin at 8% in 1H15 because of the strong ratio of order backlog to revenue. Fitch expects the company to maintain EBITDA margin at around 8% in 2016 and 2017.

Leverage to Decrease after 2016: Investment in Build, Order and Transfer (BOT) concessions have resulted in CCCC's FFO-adjusted net leverage rising to 5.25x in 2014 from 4.21x in 2013. We expect the company's leverage to come off after 2016 as its BOT projects transition into public-private partnerships (PPP), with the project companies ring-fenced under the PPP model. However, Fitch would only be able to fully assess the benefits and risks of the PPP model, which is relatively new in China, when more projects use it and rules related to the model become clearer.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Revenue growth to remain around 9%-11% between 2016 and 2018.
- EBITDA margin to remain around 8.0%-8.5% between 2016 and 2018
- FFO net leverage to peak in 2015-2016

RATING SENSITIVITIES

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

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the Chinese sovereign
- Weakening linkage between CCCC and CCCG
- Weakening linkage between CCCG and the Chinese sovereign.