Fitch Ratings has affirmed China-based Hainan State Farms Investment Holdings Group Co., Ltd.'s (HSF) Long-Term Foreign- and Local -Currency Issuer Default Ratings (IDRs) at 'BBB' with a Stable Outlook.

Fitch has also affirmed HSF's senior unsecured USD300 million bonds due February 2024 at 'BBB'. The bonds were issued by HSF's indirect wholly owned subsidiary, Hainan State Farms International (HK) Co., Limited, and are unconditionally and irrevocably guaranteed by HSF.

The affirmation reflects the Hainan provincial government's continued support for HSF and the company's strong government linkages, given its important role in developing the local agriculture industry.

KEY RATING DRIVERS

Status, Ownership and Control: 'Very Strong'

HSF is a limited liability company under China's company law. This is no automatic liability transfer under its legal status, in line with other Chinese government-related entities (GREs). HSF is 90% owned by the Hainan State-owned Assets Supervision and Administration Commission (SASAC) and 10% by the Hainan Department of Finance. The Hainan government exerts 'Very Strong' control over HSF by appointing its senior management, approving development and annual investment plans, monitoring operational results and performing year-end assessments.

Support Track Record: 'Strong'

The Hainan government has injected all of HSF's paid-in capital, which totalled CNY8.8 billion at end-2022, while Hainan SASAC injected CNY550 million in cash during 2020-2021. HSF relies on government subsidies to maintain its profitability; it received CNY5.2 billion in subsidies during 2018-2022, which amounted to 2.2x its total net profit during the same period. The subsidies are mainly for natural rubber income insurance and disaster insurance fees. The government also redistributes to HSF part of the profit from land sales that it requisitioned prior to 2020 and resold to the market.

Ample land resources have been injected into HSF, providing a solid foundation for the company's business diversification and revenue growth. HSF had land resources of over 9.6 million mu (equivalent to 6,425 square kilometres) at end-2022, of which 96.8% was farmland. This accounted for around 18% of the province's total land area. HSF has capitalised land resources of CNY55.9 billion during 2018-2022, which accounted for around 75% of its total equity as end-2022.

Socio-Political Implications of Default: 'Moderate'

HSF's role in securing natural rubber and food supplies and promoting the development of the local agricultural industry is important to social welfare and local economic growth. We therefore expect the government to provide administrative or fiscal support to ensure HSF's operational viability. However, the government can appoint other GREs to act as substitutes, if needed. In addition, HSF's main subsidiary, China Hainan Rubber Industry Group., Ltd, is a listed company that engages in the rubber industry value chain and thus faces intense competition from the private sector.

Financial Implications of Default: 'Moderate'

HSF is the second-largest GRE by total assets that is directly held by the Hainan government. It also taps the bond market, with CNY3.4 billion in onshore bonds and USD300 million in offshore bonds as of 4 July 2023. Furthermore, the company maintains banking facilities with major state-owned and policy banks. Thus, a default by HSF or its subsidiaries would affect the financing costs for the government and other state enterprises, and damage the reputation and creditworthiness of Hainan province.

However, the implications of HSF's default are limited by its small amount of public debt compared with other Fitch-rated provincial-level GREs; its total debt outstanding of CNY15.8 billion was only 4.5% of Hainan province's direct debt as of end-2022.

Standalone Credit Profile

We assess HSF's Standalone Credit Profile (SCP) at 'bb'. We classify HSF as a government-owned strategic investment holding company that mainly invest in the agricultural industry, thus we derive its SCP based on parent-level financials. At the parent level, HSF mainly generates investment income from dividends paid from its equity investments or from the sale of equity and assets. It also generates income from property sales and receives subsidies from the provincial government.

Revenue Defensibility 'Midrange'

We assess HSF's revenue defensibility as 'Midrange'. This reflects a combination of 'Midrange' demand characteristics and 'Midrange' pricing characteristics. HSF has a diversified portfolio and stable investment income from subsidiaries and associate companies. The assessment also factors in the leading market position of HSF's key subsidiary, Hainan Rubber, industry concentration in the agricultural industry and geographic concentration in Hainan province.

Operating Risk 'Midrange'

We assess operating risk as 'Midrange'. This reflects a combination of 'Midrange' operating costs and resource management and 'Neutral' capital planning and management. HSF has well-identified cost drivers and an adequate supply of labour. It has operated smoothly in the past without major delays or accidents.

Financial Profile 'Weaker'

We assess the financial profile as 'Weaker' due to the company's high leverage. We expect leverage, as measured by net adjusted debt/EBITDA, to reach 9.3x by 2027 under Fitch's rating case, following an acquisition in April 2023 and further investment plans. However, we believe the company has strong refinancing capability, ample undrawn credit facilities, stable dividend income from major subsidiaries and good asset quality.

Derivation Summary

We rate HSF under our Government-Related Entities Rating Criteria, reflecting Hainan province's strong control over the company and the solid support that it provides. We also factor in the socio-political and financial implications for the government should HSF default.

We derive HSF's SCP by assessing the company's revenue defensibility, operating risk and financial profile under our Public Sector, Revenue-Supported Entities Rating Criteria.

Liquidity and Debt Structure

HSF had an unrestricted cash balance of CNY7.3 billion and undrawn bank facilities of CNY30.7 billion at the consolidated level as of end-2022. This was sufficient to cover its entire adjusted debt balance. We regard the debt maturity profile to be concentrated in the short term. On a consolidated basis, debt maturing during 2023-2024 accounted for 70% of total debt as of end-2022. Of HSF's direct debt, 40% consisted of bonds, while the rest was bank borrowings.

Issuer Profile

The provincial government mandates HSF to manage and invest in key agricultural assets. It is the largest comprehensive agricultural industry group in Hainan and the largest natural rubber producer. It mainly engages in natural rubber, tropical agricultural and property development and construction. Its role is important in securing local natural rubber supply, local food supply and promoting the development of the local agricultural industry.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Deterioration in Fitch's perception of the Hainan provincial government's ability to provide subsidies, grants or other legitimate resources allowed under policies and regulations.

A weakening of the socio-political or financial implications of a default by HSF and support by the government, or a dilution of the government's control in the company.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Improvement in Fitch's perception of the Hainan provincial government's ability to provide subsidies, grants or other legitimate resources allowed under policies and regulations.

Stronger socio-political or financial implications of a default by HSF or support from the government.

A multi-notch lift in the SCP.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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