A Closer Look at China’s LGFVs: Hubei October 12, 2020 ANALYSTS Key Takeaways Lei Wang Beijing ― The median indicative issuer credit quality of local government financing vehicles (LGFVs) +86-10-6516 6038 in Hubei Province is, in our view, slightly higher than that of the national level. [email protected] ― We found that Wuhan’s LGFVs have generally better indicative issuer credit quality than Yunxin Jia LGFVs in other Hubei cities. Beijing +86-10-6516 6041 ― As the COVID-19 pandemic subsides, we expect that Hubei’s economy can quickly recover [email protected] and that the indicative issuer credit quality of its LGFVs are generally resilient. Di Jiao To get a full picture of the overall indicative credit quality of LGFVs in Hubei Province, we carried Beijing out a desktop analysis of 89 LGFVs in the region, using public information. Our sample includes +86-10-6516 6039 LGFVs at the city-level and below and subway companies but excludes provincial-level LGFVs [email protected] (like transportation construction companies, investment holding companies and utility companies). The entities in the sample represent close to 86% of all LGFVs with bonds Xiao Zhang outstanding in Hubei, covering 13 of the province’s prefecture-level regions and 3 county-level Beijing cities. In our opinion, they offer a comprehensive reflection of the overall indicative credit quality +86-10-6516 6036 of LGFVs in Hubei. [email protected] Local government support is, in our view, generally the most important factor when considering Ye Liu the indicative credit quality of LGFVs. In this report, we have analyzed the indicative importance Beijing of LGFVs to Hubei’s municipal governments, and the municipal governments’ indicative ability to +86-10-6516 6035 provide vehicles with support. [email protected] Chart 1 Comparing Bonds Outstanding Among Hubei LGFVs and Nationwide 1,800 1,600 1,400 1,200 1,000 800 600 393.6 billion RMB 400 Amount Amount (RMB, billion) 200 0 Jilin Tibet Anhui Hebei Hubei Fujian Gansu Henan Hunan Tianjin Shanxi Beijing Jiangxi Hainan Ningxia Yunnan Qinghai Jiangsu Xinjiang Shaanxi Guangxi Sichuan Guizhou Liaoning Zhejiang Shanghai Shandong Chongqing Guangdong Heilongjiang Note: LGFV debt defined by Wind, data as of December 31, 2019. Mongolia Inner Source: Wind, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. A Closer Look at China’s LGFVs: Hubei October 12, 2020 About This Article S&P Ratings (China) Co., Ltd. (S&P China) has conducted a desktop analysis of a selection of entities based in the relevant region. We have chosen these entities based on their asset sizes, representativeness of most regions and availability of public information. The analysis contained herein has been performed using S&P China Methodologies. S&P China Methodologies and analytical approaches are intended specifically for use in China only, and are distinct from those used by S&P Global Ratings. An S&P China opinion must not be equated with or represented as an opinion by S&P Global Ratings, or relied upon as an S&P Global Ratings opinion. This desktop analysis has been conducted using publicly available information only, and is based on S&P China’s methodologies for corporates. The analysis involves a desktop application of our methodologies to public information to arrive at a potential view of credit quality across sectors. It is important to note that the opinions expressed in this report are based on public information and are not based on any interactive rating exercise with any particular entity. The opinions expressed herein are not and should not be represented as a credit rating, and should not be taken as an indication of a final credit rating on any particular entity, but are initial insights of potential credit quality based on the analysis conducted. This desktop analysis does not involve any surveillance. The opinions expressed herein are not and should not be viewed as recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. We have conducted this desktop analysis on individual corporates and present the results contained herein at an aggregate group level. The different sections of this research show the statistics and performance of different groups of entities and the market more broadly against the metrics we generally consider most relevant under our methodologies. Given the desktop nature of this analysis, and that we have not conducted an interactive review with any particular entity, we may have made certain assumptions in lieu of confirmed information and where relevant we may also have attempted to consider any possibility of parent, group, government or other forms of potential support, to inform our view of potential credit quality. S&P China is not responsible for any losses caused by reliance on the content of this desktop analysis. On the National Level: Hubei LGFVs Slightly Stronger Overall Known as “the thoroughfare of nine provinces,” Hubei Province is located in the heart of central China. Its geographic advantages and plentiful resources make Hubei a key province along the Yangtze River Economic Belt, and its economic strength is above the national average. In 2019, Hubei’s GDP was 4.6 trillion RMB, ranking seventh overall nationwide. The province ranked eighth overall for its GDP per capita of 77,321 RMB. In terms of its industrial structure, Hubei’s primary, secondary and tertiary industries accounted for 8.3%, 41.7% and 50.0% respectively. Hubei has a relatively diversified industrial structure, with historical roots in heavy industry complimented in recent years by the rapid development of high-tech industries. Pillar industries include auto manufacturing, agriculture and food processing, chemical raw materials and chemical products, non-metal mineral products and manufacturing of technology hardware. Following the outbreak of COVID-19, Hubei’s economy suffered a severe blow in the first half of 2020. However, effective controls on the pandemic have seen a rapid return to production in the province. S&P Global (China) Ratings www.spgchinaratings.cn 2 A Closer Look at China’s LGFVs: Hubei October 12, 2020 The median indicative issuer credit quality of the 89 Hubei LGFVs in our sample is slightly higher than that of around 1800 LGFVs at the national level. This, in our opinion, can largely be attributed to the majority of LGFVs in Hubei being of higher indicative importance to their local governments. Chart 2 Indicative Credit Quality: Comparing LGFVs in Hubei and Nationwide [BBB]*category [BB]*category [BBB]*category [BB]*category [A]*category [A]*category Hubei [B]*category [AA]*category & above China [AA]*category & above Note: *The indicative credit quality distributions expressed in this report are only S&P China’s indicative views of credit quality derived from a desktop analysis based on public information without interactive review with any particular entity or the full credit rating process such as a rating committee. The opinions expressed herein are not and should not be represented as a credit rating and should not be taken as an indication of a final credit rating on any particular entity. Curve represents the proportion of companies in the sample. Source: S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Within the Province: Wuhan LGFVs Have Better Indicative Issuer Credit Quality Our analysis found that where the business and financial risk profiles of LGFVs are similar, there are fewer differences between LGFVs in terms of indicative stand-alone credit quality. Differences in credit quality among LGFVs can largely be attributed to differing levels of government support. We look at local government indicative support from two angles: the indicative support capability of the local government and the LGFV’s potential importance to the relevant local authority. Analysis of Local Government Indicative Support Capability After looking at each city in Hubei relevant to our sample and considering factors such as economic performance, budget, debt, liquidity and financial management, we believe that cities in the province vary in terms of their indicative support capacities. The provincial capital Wuhan has significantly stronger indicative support capacity for LGFVs than other cities. Tianmen, on the other hand, is at the lower end in terms of its local government’s indicative support capability. The chart below reflects our view on local governments’ indicative support capacity for LGFVs across Hubei. The darker the color, the stronger the indicative support capability for LGFVs, and vice versa. S&P Global (China) Ratings www.spgchinaratings.cn 3 A Closer Look at China’s LGFVs: Hubei October 12, 2020 Chart 3 In our opinion, differences in economic and financial strength as well as the debt levels of cities in Hubei have resulted in varying levels of indicative support capacity. Wuhan has the strongest economy in the province, with its GDP accounting for around 35% of the province’s total in 2019. While its debt ratio is one of the highest in the province, Wuhan’s debt looks less like a problem when we consider its leading economic position. Xiangyang and Yichang both recorded over 400 billion RMB of GDP in 2019, putting them in the second tier in the province. However, these cities also have relatively high debt levels for the province. Tianmen, Qianjiang and Xiantao are county-level cities, and their economies are smaller than other cities in Hubei. However, they have moderate debt levels. Enshi has the lowest debt ratio in the province, which is mainly because of the large-scale transfer payments it receives from higher-level governments. In general, although Hubei cities vary in terms of absolute debt sizes, their debt levels relative to fiscal revenues are fairly consistent.