Fitch Ratings has affirmed
The Outlook is Stable.
CTG's ratings are equalised with
CYPC's ratings are equalised with those of its 55.51% parent, CTG, based on a 'High' strategic incentive, 'High' operational incentive and 'Medium' legal incentive for CTG to provide support, under our Parent and Subsidiary Linkage Rating Criteria.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
'Very Strong' State Linkage: We assess CTG's status, ownership and control as 'Very Strong'. The company is a backbone state-owned enterprise (SOE) that is 90% owned by the central State-owned
We assess CTG's support record as 'Very Strong'. The construction of the Three Gorges hydropower project received government funding through sizeable equity injections via a fund that was financed by nationwide power tariffs. Intangible support includes mandates to build resource-rich and profitable hydropower stations in
Strong Impact of Default: We assess the socio-political implications of a default by CTG as 'Strong', due to the political sensitivity of the Three Gorges project. CTG is
Hydropower Output Recovering: Water flow along the
Rapid Expansion in
Low Return from Environmental Protection: We expect CTG to slow the expansion of its environmental protection section from 2023, given the lower return of environmental projects compared with its other businesses. This follows intensive investment in the past few years, with the segment's total assets ballooning to
SCP Assessed at 'bbb': CTG has the strongest business profile among Fitch-rated Chinese power generation companies, supported by its globally significant scale, high asset quality, stable generation volume, competitive costs and low tariff volatility. However, EBITDA net leverage rose to 6.2x in 2022, from 5.9x in 2021, on weaker water flow. We expect gradual deleveraging towards 5.6x over the next four years, although this is subject to the company's capex and equity investment appetite.
CYPC Equalised with Parent: We assess the strategic incentive for CTG to support CYPC as 'High', as CYPC owns CTG's most important operational assets; the six major hydropower plants on the
The 'High' operational incentive to provide support reflects 'High' management overlap and strong group control, while we assess synergies at 'Medium'. The 'Medium' legal incentive reflects CTG's large public bonds with cross-default clauses covering CYPC. We expect CYPC's EBITDA net leverage to rise to 5.8x in 2023 (2022: 2.7x) after the acquisition of two major hydropower stations, before resuming deleveraging as a result of positive free cash flow.
Derivation Summary
Our 'Very Strong' assessment of CTG's status, ownership and control is the same as that of
Our 'Very Strong' assessment of CTG's support record reflects the sufficient financial support it has received, government mandates to build and operate resource-rich hydropower stations and the resulting investment-grade SC. This compares with 'Strong' for Huadian and SPIC.
We assess the socio-political implications of a CTG default as 'Strong', reflecting the high political and reputational risk of a default, in line with Huadian and SPIC. The financial implications of a default are assessed as 'Very Strong', in line with the assessment for Huadian and SPIC. CTG is a large international and domestic borrower and is viewed by Fitch as a proxy government borrower, while a default by Huadian or SPIC may jeopardise financing access for the other big-five Chinese independent power producers in light of their significant combined debt exposure.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Power generation of the six major hydropower stations to slightly increase in 2023, as capacity expansion at the Baihetan station and water flow recovery in 2H23 compensate for weak output in 1H23
Power generation of major hydropower stations to increase by single-digits during 2024-2026, as water flow recovers
Average tariff of the main hydropower plants to marginally trend down due to more market-traded volume and lower market prices
Wind and solar power capacity to increase by 7.5GW a year on average during 2023-2026
Annual capex to stay in the range of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
CTG
Positive rating action on the Chinese sovereign, provided the likelihood of support from the government remains intact
CYPC
An upgrade of CTG's ratings, provided the likelihood of support from CTG remains intact
Factors that could, individually or collectively, lead to negative rating action/downgrade:
CTG
Negative rating action on the Chinese sovereign or a weakening of the likelihood of support from the government
CYPC
A downgrade of CTG's ratings or a weakened likelihood of support from CTG to CYPC.
For the sovereign rating of
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Public Finances: A sustained upward trajectory in general government debt/GDP from persistently high fiscal deficits or a rise of contingent liabilities, for instance from LGFVs, such that debt levels compare less favourably with rated peers.
Macro: Reduced confidence in economic policymaking and medium-term growth prospects.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Structural Features: A material reduction in macro-financial risks and associated contingent liabilities facing the sovereign, for example, by maintaining credit growth below nominal GDP growth over a multi-year period, which would cause the removal of the -1 QO notch on structural features.
External Finances: Widespread adoption of the Chinese yuan as a reserve currency, as reflected in a substantial increase in the share of yuan-denominated claims in the
Liquidity and Debt Structure
CTG had
CYPC had short-term debt of
Issuer Profile
CTG is the world's largest hydropower producer. It owned more than 124.7GW in power generation capacity as of 2022. CTG also operates wind and solar power assets and is committed to environmental projects, mainly along the
CYPC is CTG's flagship listed subsidiary, holding the parent's most important hydropower assets. It is the parent's largest revenue and cash flow contributor.
Summary of Financial Adjustments
Fitch adjusted CTG's readily available cash at end-2022 by giving 100% cash benefit to its
CTG received a
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
CTG's ratings are equalised with those of the
CTG.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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