Moody's: China's robust railway spending is credit positive for China Railway Construction

Moody's Investors Service says that the Chinese government's (Aa3 negative) plan to continue spending strongly on railway construction in 2016 is credit positive for China Railway Construction Corporation Limited (CRCC) and supports its A3 issuer rating; the A3 rating on the senior guaranteed perpetual securities issued by CRCC Yupeng Limited and guaranteed by CRCC; and the A3 rating on the bond issued by CRCC Yuxiang Limited and guaranteed by CRCC.

The outlook on all ratings remains negative.

On 5 March 2016, at the Fourth Session of the 12th National People's Congress, Chinese Premier Li Keqiang announced that the Chinese government will invest more than RMB800 billion on railway infrastructure development in 2016, which is similar to the RMB824 billion spent in 2015 and RMB809 billion in 2014, but significantly higher than the RMB666 billion in 2013, RMB634 billion in 2012 and RMB591 billion in 2011.

"CRCC will be the main beneficiary of the government's plan to continue spending heavily on railway infrastructure development, given its dominant position in the domestic railway construction industry," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

Moody's estimates that CRCC has an approximate 45%-50% market share in China's railway construction industry and is effectively part of a duopoly. Revenue from railway construction accounts for about 45% of CRCC's construction segment revenue. The construction segment contributed about 87% of CRCC's total revenue of RMB518 billion for the 12 months ended 30 June 2015.

Moody's expects CRCC to grow its revenue by mid-single digit percentages per year over the next 12-18 months, given its large order backlog of trillion at end-June 2015, representing around three years of revenue, and the expectation that solid spending on railway construction and infrastructure development, including roadways and bridges, will continue in 2016 and 2017 in China.

Moody's also expects CRCC's adjusted EBITDA margin to remain stable over the next 12-18 months, driven by its extended service offerings and continued cost controls.

CRCC will keep its investments in real estate and build-transfer (BT) and build-operate-transfer (BOT) projects to manageable levels, limiting increases in debt over the next two years.

Therefore, Moody's expects CRCC's adjusted debt/EBITDA to improve slightly to around 5.0x over the next 12-18 months from 5.1x for the 12 months ended 30 June 2015. This level of leverage will be in line with its standalone credit quality, but leaves little leeway for further deterioration at the current rating level.

The A3 issuer rating incorporates a three-notch uplift based on Moody's assessment of expected parental support from China Railway Construction Corporation (unrated).

China Railway Construction Corporation Limited (CRCC) is one of the largest integrated construction companies in China. The company focuses on railway, highway, and subway construction. It also has sizeable operations in other construction and non-construction businesses.

The company was 55.73%-owned by China Railway Construction Corporation (CRCCG) as of 30 November 2015, which is a central state-owned enterprise. The parent company is wholly owned by the State Council of China and supervised by the State-owned Assets Supervision and Administration Commission.