China Jinjiang Environment Outlook Revised To Positive On Acquisition By Zhejiang Energy; Ratings Affirmed

  • China Jinjiang Environment Holding Co. Ltd. (CJE) will no longer be constrained by the credit profile of Hangzhou Jinjiang Group Co. Ltd. (HJG) as it is no longer CJE's largest shareholder.
  • CJE could receive a rating uplift based on expectations that Zhejiang Provincial Energy Group Co. Ltd. (Zhejiang Energy) will provide group support to the China-based waste-to-energy (WTE) operator, though supporting elements will be needed to determine if CJE is eligible to become a member of Zhejiang Energy group as well as its group status.
  • On Sept. 3, 2019, S&P Global Ratings revised its outlook on CJE to positive from negative. At the same time, we affirmed the 'BB-' long-term issuer credit rating on the company. We also affirmed the 'B+' long-term issue rating on the company's senior unsecured notes.
  • The positive outlook reflects CJE's acquisition by a provincial state-owned enterprise (SOE) with a strong credit profile, which could improve funding stability. The outlook is also based on expectations that CJE's ratio of funds from operations (FFO) to debt will stay above 9% over the next 12-18 months.
HONG KONG (S&P Global Ratings) Sept. 3, 2019--S&P Global Ratings today took the rating actions listed above. We revised the outlook on CJE to positive from negative to reflect our view that the company could be eligible for a rating uplift after Zhejiang Energy took over as largest shareholder from HJG. We believe Zhejiang Energy, one of the largest SOEs in Zhejiang province, has better credit quality than HJG and that the new parent is likely to provide more support to the subsidiary.
On Aug. 21, 2019, CJE announced that Zhejiang Energy, via its subsidiary Zhejiang Energy Hong Kong Holding Ltd., had completed the purchase of 29.8% of CJE's shares from HJG and become the largest shareholder. CJE founder Mr. Dou Zhenggang and his family reduced their indirect shareholding to 25.8% from 55.6% through HJG and became the second-largest shareholder after the transaction. We expect Zhejiang Energy to assume effective control over CJE and consolidate CJE's financials to its financial report. When the new board members and chairman representing Zhejiang Energy have been appointed, and there is a clearer understanding of CJE's role and importance to Zhejiang Energy, we will reevaluate the likelihood of support CJE can receive from the new parent.
In our view, the change in controlling shareholder is credit positive for CJE. We expect the SOE shareholder to potentially improve CJE's access to funding and lower its financing costs. From a group support perspective, we believe Zhejiang Energy's stronger creditworthiness could enhance CJE's credit strength compared with HJG. Zhejiang Energy is one of the largest SOE energy suppliers in Zhejiang province and plays a dominant role in power generation and natural gas supply within the province. We believe the cooperation between the two companies can yield mutual benefits; CJE could benefit from refinancing and lower funding costs, while Zhejiang Energy could diversify its traditional power generation portfolio by entering the WTE space.
That said, we continue to believe that CJE's financial performance will experience a trough in 2019. This may temper the positive influence from the new parent group. We estimate that the company's FFO-to-debt ratio deteriorated to 9.8% in the first half of 2019, weaker than our previous forecast for 2019. The deterioration was mainly due to reduced contributions from its project technical and management services and its energy management contract business as well as the increase in debt-funded capital expenditure (capex). In the second half of 2019, we expect seven of the eight WTE facilities to complete the upgrade process and to be in full operation by the fourth quarter. We therefore estimate CJE's FFO-to-debt ratio to remain at 9%-10% over the next 12-18 months, taking into account the slowdown in CJE's overseas expansion and development.
The positive outlook reflects our view that CJE is likely to benefit from the parental support of Zhejiang Energy, the new controlling shareholder with a provincial SOE status, should it fall into financial difficulty. We expect CJE to benefit from lower funding costs after Zhejiang Energy's takeover while it gradually completes the upgrade of its WTE facilities and reduces its capex such that the company's FFO-to-debt ratio remains at above 9% over the next 12-18 months.
We may revise the outlook to stable or even lower the rating if we believe:
  • The positive influence from Zhejiang Energy is limited and CJE's FFO-to-debt ratio is consistently below 9%-10%.
  • In a less likely scenario, the parental support from Zhejiang Energy is offset by significant and enduring deterioration in CJE's cash flow as well as leverage position due to aggressive debt-funded expansion, or a material decline in the company's profitability.
We could upgrade CJE if we believe: (1) Zhejiang Energy is likely to provide support to CJE as a subsidiary with some level of strategic importance should CJE fall into financial distress, and (2) CJE's FFO-to-debt ratio stays above 9% in the next 12-18 months.
The strategic importance of CJE to Zhejiang Energy will need to be demonstrated consistently in a number of ways. These include Zhejiang Energy maintaining its stake in CJE in the near term and being actively involved in CJE's strategy or future development plans, and Zhejiang Energy showing longer-term commitment to CJE, such as cross-default clauses in Zhejiang Energy's debt documentation classifying CJE as a related subsidiary where the parent might have the obligation to upkeep CJE's financials and liquidity conditions.
CJE could also be upgraded on a stand-alone basis even if we assess it as having limited support from the new parent. This could happen if we conclude CJE has adequate liquidity and its FFO-to-debt ratio is consistently above 15%.
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