ข่าวประชาสัมพันธ์เศรษฐกิจ/การเงิน

Beijing Environment Sanitation Engineering Group Co. Ltd. Assigned ‘BBB’ Rating; Outlook Stable

          SINGAPORE (S&P Global Ratings) Sept. 14, 2018--S&P Global Ratings said today that it has assigned its 'BBB' long-term issuer credit rating to Beijing Environment Sanitation Engineering Group Co. Ltd. (BESG). The outlook is stable. 
          BESG is an environmental services company based in Beijing. It is wholly owned by the Beijing municipal government. The company's main business is environmental sanitation. It is also engaged in waste recycling and sanitation equipment manufacturing. 
          The rating on BESG reflects the company's sound business position in the growing environmental sanitation market in China and favorable revenue visibility. Market fragmentation, the company's relatively narrow focus, limited access to the capital market, and rapidly growing debt offset these strengths. The rating also reflects our view of a high likelihood that the company will receive extraordinary support from the Beijing municipal government in the event of financial stress.
          Our view of the extraordinary government support to BESG is based on the following: 
          - Very strong link to the Beijing municipal government. Founded and directly wholly owned by the Beijing government through its State-owned Assets Supervision and Administration Commission (SASAC), BESG's chairman and president are directly appointed by the government. The government also directs its strategy, including key projects and financing decisions. Similar to other much larger-scale sister state-owned enterprises (SOEs), BESG is monitored by SASAC for its performance and financial leverage.
          - Important role to the government. BESG provides environmental sanitation services to Beijing. It cleans 24% of the roads (including arterial roads, Tiananmen Square) and treats two-thirds of Beijing's solid waste. It has an evergreen exclusive right to collect, transport, and treat waste for central Beijing (Xicheng, Dongcheng districts, and parts of surrounding districts). In our view, such a role is an essential public service and difficult to replace because of the social and political sensitivity of the locations. 

          We expect BESG to sustain its sound market position in China. The company's competitive edge is based on a decades-long track record of delivering satisfactory environmental services for the heart of Beijing. BESG currently has one of the leading market shares in China's addressable environmental sanitation market (i.e., waste cleaning, collection, and transportation, but not including waste treatment). The company has secured 98 contracts across 22 provinces/autonomous regions/subnational cities. Half of its sanitation revenues come from Beijing where it is the dominant player. 
          Recognizable service quality, brand equity, and its SOE background has enabled BESG to win nearly all of the bids that the company has tendered. This is about 10%-15% of the bids in the environmental sanitation service space--particularly bigger-value contracts--over the past two years. The company has also expanded into full-value chain waste treatment that includes mostly landfill development and operations. We expect BESG to grow its geographic footprint as more local governments outsource public services to commercial entities. The central government's supportive policy to improve the environmental livelihood for both urban and rural population and intention to further commercialize the sector provide room for industry players to grow.
          High visibility over revenues is another credit strength for BESG. Under the terms of the company's front-end and mid-end sanitation contracts, it must meet specific service requirements to earn revenues, which are typically adjusted for inflation every three years. The company also won some integrated contracts that include back-end waste treatment facilities (mostly landfill) given its decades of experience in the capital city. Demand for its services is recession-resistant. BESG's average contract tenor (weighted by contract value) is more than 15 years. 
          In our view, counterparty risk is manageable, such that the company receives most of the revenues without much delay. Compared with its peers, BESG generally targets bigger cities that usually have stronger fiscal capacity than lower levels of governments. We believe lengthy payment delays are not likely, given individual payment amounts are relatively insignificant and part of the respective government budget.
          High market fragmentation offsets the company's strengths because competition could be high, in our view. The top four companies have less than 20% of the addressable market, which in turn is about 20% of the aggregate market that includes those covered by the government in-house. BESG's competitors include subsidiaries of well-funded larger SOE groups, listed private sector companies that have diversified funding channels, and waste-to-energy (WTE) players that are looking to go upstream. Competition in a fragmented market could drive down margins on new contracts.
          BESG has limited experience in developing and operating WTE facilities, which could dilute the company's competitive strength. With landfills over-utilized in populous cities including Beijing, WTE is gaining traction. We consider front-end sanitation services to be less capital intensive and to have a lower entry barrier. In our view, BESG has yet to expand and deepen its funding channels as it seeks integrated contracts across the full value chain, which would provide synergy with upstream sanitation but would require significant capital expenditure (capex). 
          We expect BESG's balance-sheet strength to deteriorate following its increased investments in back-end waste treatment and fast expansion outside its home market. This is reflected in our expected ratio of funds from operations (FFO) to debt diving to 16%-20% in 2018, from 30% in 2017 and 65.6% in 2016. Debt will grow as cash flow generation is outsized by capex mostly for its treatment facilities. We expect debt to at least double by 2019 from the amount in 2017, even after factoring in the proposed sale of the waste recycling segment, which has about RMB380 million in external debt. While EBITDA should grow quite strongly year on year through 2019, cash flow generation will increase more slowly due to investment in receivables and inventory. 
          In our view, the company has a short track record of delivering against its ambitious growth aspirations to increase revenue and total assets at a double-digit compound rate by 2020. Moreover, the company has yet to demonstrate a similar history of integrating and operating at a much higher scale and expanse, in particular back-end facilities outside of Beijing. We also consider BESG's financial discipline to be untested amid pressure to balance growth and leverage. In particular, BESG would need to deleverage in order to achieve the target 70% ratio of total liabilities over total assets set by the Beijing SASAC (2017: 77% actual). 
          The stable outlook on BESG for the next 12-18 months reflects our expectation that the company will sustain its competitive position vis-à-vis competition domestically amid increasing commercialization of the market for environmental sanitation services. We also expect the company to maintain its ratio of FFO to debt at 16%-20% while expanding its business. 
          We could lower the rating if BESG's stand-alone credit profile (SACP) deteriorates by one-notch to 'bb-'. This could happen if the company's financial health weakens, as indicated by a FFO-to-debt ratio below 12% or FFO cash interest coverage below 3x with no immediate signs of recovery. This could be caused by aggressive debt-funded capex outpacing cash flow generation, or operating cash flow generation that is weaker than we expected due to subpar cash conversion of operating profits. 
          In a less likely scenario, we may lower the rating if the likelihood of extraordinary government support from the Beijing government weakens to moderately high. This could happen if the government loosens its control over BESG due to ownership dilution or if the environmental services business in Beijing is redirected to other entities. 
          We could upgrade BESG if the company demonstrates a track record of stable operations as it grows at a larger scale with predictable cash flows and maintains leverage, as measured by a ratio of FFO to debt sustainably above 20%. This would entail the company to obtain and convert quality projects into cash flows that could offset higher debt.