OREANDA-NEWS. Fitch Ratings says the significant improvement in the credit metrics and liquidity of Shenzhen Expressway Company Limited (SZE, BBB/Stable) and its major shareholder, Shenzhen International Holdings Limited (SIH, BBB/Stable) at end-December 2015 have no immediate impact on their ratings. This is because both companies have significant investment plans in expressway assets and real-estate projects.

SZE's cash balance reached CNY6.4bn at end-2015, rising from CNY1.6bn a year earlier. The Shenzhen government provided a non-recurring CNY6.6bn as compensation for toll adjustment relating to three expressways - Nanguang Expressway, Yanba Expressway and Yanpai Expressway. The increase in cash led to a reduction in FFO-adjusted net leverage to below 1x at end-2015 from 3.5x a year earlier.

SZE expects to deploy the majority of the compensation in the construction of a new expressway in Shenzhen, called Outer Ring Section A (Outer Ring Project), with the Transport Commission. The investment cost borne by SZE will be capped at CNY6.5bn, with the Shenzhen Municipal Government paying for the remaining cost. The government expects the Outer Ring Project to be completed and opened to public by 2019, which Fitch expects will improve SZE's sustainable cash flows after losing the recurring toll fees from the three expressways.

Aside from the Outer Ring Project, SZE would continue to look for potential expressway acquisitions and investing in real-estate projects. Real estate development projects typically have higher business risks than expressways because real-estate cash flows are subject to market conditions and much of the cash flows are likely to be non-recurring. SZE's credit profile will depend on the eventual business mix; in 2015, the expressway business accounted of over 90% of SZE's gross profit.

SIH's financial position improved in 2015, with consolidated cash balance rising to HKD15.6bn from HKD7.6bn at end-2014. SIH also reported a net cash position of HKD2.6bn on a consolidated basis compared with net debt of HKD8.1bn a year ago.

Excluding the cash balances at SZE, SIH's cash balance was HKD8.0bn at end-2015, up from HKD5.7bn at end-2014. The increase in cash was due mainly to the Shenzhen government providing compensation of CNY3.1bn in relation to toll adjustment of the Longda-Shenzhen Section of the Longda to Nanguang expressway. SIH also raised HKD729m in after-tax proceeds from the sale of shares in CSG Holding Co Ltd, a non-core operation of the group. SIH, excluding SZE, had a net cash position of HKD2.9bn as at end-2015 (end-2014: net debt of HKD32m).

SIH expects to spend HKD8.1bn in capex in 2016 (including capex of SZE), up from HKD2.6bn in 2015. Most of the capex will be spent on real-estate projects: HKD3bn on the Meilin Checkpoint Urban Renewal Project, HKD1.9bn on the logistics business and HKD1.4bn to acquire a headquarters building in Shenzhen. In the medium term, the company will also invest in developing its land in Qianhai, likely in conjunction with other developers.

We do not expect the business profile of SIH to significantly change in the immediate term, and expect its expressway assets to account for a majority of cash flows in the next two to three years. A significant increase in non-expressway operations could weaken SIH's overall risk profile over the medium term.

SIH's ratings reflect the combined credit profile of the toll-road operations and the logistics business, with a single-notch uplift for implied support from its 43.9% shareholder, the Shenzhen Municipal Government. We do not envisage any near-term changes in the relationship between SIH and the Shenzhen government or expectations of support to SIH.