A Closer Look at China’s LGFVs: Guangxi April 22, 2020 Primary Analyst Key Takeaways Dan Li Beijing — We believe that the median indicative issuer credit quality of local government +86-10 6516 6042 financing vehicles (LGFVs) in Guangxi Zhuang Autonomous Region is on a par with a [email protected] nationwide sample of LGFVs. However, Guangxi has a higher proportion of vehicles Secondary Analysts with indicative issuer credit quality at the lower end of the spectrum than the national Yu Ge sample. Beijing +86-10 6516 6026 — Certain Guangxi cities, in our view, have average indicative support capacity, with [email protected] weaker economic development potential and higher dependence on subsidies from higher authorities for fiscal revenue. Yuze Gao Beijing — In our view, due to the small number of LGFVs, most city-level LGFVs in Guangxi are +86-10 6516 6028 engaged in local infrastructure investment and financing as well as public mandates, [email protected] making them highly important to their local governments. Juanzi Zhang Beijing To get a full picture of the overall credit quality of LGFVs in Guangxi Zhuang Autonomous Region, +86-10 6516 6030 we carried out a desktop analysis of 35 LGFVs, using public information. Our sample includes [email protected] LGFVs at the city-level and below and subway companies but excludes provincial level LGFVs (like transportation construction companies, investment holding companies and utility companies). The entities in the sample cover 13 prefecture-level cities, and we believe they present a comprehensive reflection of the overall indicative credit quality of LGFVs in Guangxi. We believe local government support is generally the most important factor when we consider the indicative credit quality of LGFVs. In this report, we have analyzed Guangxi municipal governments’ indicative ability to provide vehicles with support, and the importance of LGFVs to municipal governments in Guangxi. S&P Global (China) Ratings www.spgchinaratings.cn April 22, 2020 A Closer Look at China's LGFVs: Guangxi April 22, 2020 Chart 1 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 ex- pressed 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 surveil- lance. 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 informa- tion 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. S&P Global (China) Ratings www.spgchinaratings.cn 2 A Closer Look at China's LGFVs: Guangxi April 22, 2020 On the National Level: Guangxi LGFVs on Par With National Average Located in southern China, Guangxi is an important hub for the ASEAN nations. The region has an administrative area of 237,600 square kilometers, and the Beibu Gulf off its southern coast covers some 40,000 square kilometers of ocean. As of the end of 2019, Guangxi had a population of around 50 million permanent residents, with an urbanization rate of 51%. Guangxi has 14 prefecture-level cities under its jurisdiction, as well as 8 county-level cities, 63 counties (including 12 autonomous minority counties) and 40 municipal districts. We believe that the median indicative issuer credit quality of LGFVs in Guangxi is on par with a nationwide sample of vehicles, but there are relatively more LGFVs in the region with lower indicative issuer credit quality than the national sample. Chart 2 S&P Global (China) Ratings www.spgchinaratings.cn 3 A Closer Look at China's LGFVs: Guangxi April 22, 2020 Within the Province: Indicative Issuer Credit Quality Varies Among LGFVs Our analysis found that where business and financial risk profiles of LGFVs are very similar, there are fewer differences between LGFVs in terms of indicative stand-alone credit quality. Therefore, we believe that differences in credit quality can largely be attributed to differing levels of government support. We generally look at local government support from two angles: the indicative support capability of the local government and the LGFV’s importance to the relevant local authority. Analysis of Indicative Local Government Support Capability In terms of local government indicative support capacity for LGFVs, we looked at each city in Guangxi and considered factors such as economic performance, budget, debt, liquidity and financial management. Our analysis suggests that differences exist between the 13 Guangxi cities in our sample in terms of the indicative support capability of local authorities. Nanning, Guilin and Beihai can generally provide stronger indicative support to LGFVs. However, Laibin, Hezhou and Hechi have relatively weaker indicative support capacity. Chart 3 Varied Indicative Ability to Support Within the Province Guilin Liuzhou Hechi Hezhou Laibin Baise Wuzhou Guigang Nanning Stronger Chongzuo Yulin Qinzhou Weaker Fangchenggang Beihai Note: Areas in gray were not included in this study. Source: S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. We believe that differences between Guangxi cities in terms of their indicative support capacities for LGFVs can be mainly attributed to variations in their respective economies, financial strength and debt situations. S&P Global (China) Ratings www.spgchinaratings.cn 4 A Closer Look at China's LGFVs: Guangxi April 22, 2020 Nanning, Liuzhou and Guilin have the strongest economies. Provincial capital Nanning is the strongest of the three, accounting for about 20% of the province's overall GDP in 2019. Liuzhou is Guangxi’s industrial hub, with pillar industries including auto manufacturing, machinery and metals. Guilin is a famous tourist city with a developed service sector and comes second only to Nanning in terms of the weight of its tertiary industries. The economies of Liuzhou and Guilin are both expected to come under some pressure in 2020, because of industrial restructuring and a worsening external environment. Elsewhere, cities like Hechi, Laibin and Hezhou have smaller economies and rank lower in the region. In terms of debt, although Liuzhou’s economy is relatively well-developed, its debt burden is far higher than other cities in Guangxi. Liuzhou holds more LGFV debt than any other city in the region, resulting in a relatively higher hidden debt burden. This may affect its indicative support capacity for LGFVs under its jurisdiction. Chart 4 Nanning, as the provincial capital, has relatively large fiscal revenue and relatively good fiscal balance. At the other end of the spectrum in terms of fiscal revenue and balance are Hechi and Laibin. Furthermore, Guangxi is more dependent on central government support for its fiscal revenue, because of its political status as a minority autonomous region and some cities’ weaker capacity to balance their general public budgets. This dependence is more apparent in cities with smaller fiscal revenue and poorer fiscal balances. S&P Global (China) Ratings www.spgchinaratings.cn 5 A Closer Look at China's LGFVs: Guangxi April 22, 2020 Chart 5 Chart 6 Analysis of LGFVs’ Importance to Local Governments In addition to the governments’ indicative ability to support, differences in the indicative issuer credit quality of LGFVs also depend on the LGFV’s potential importance to its local government. When analyzing support, we typically consider an LGFV’s importance by looking at factors such as: the LGFV’s administrative level; its policy role; whether its business is not-for-profit or difficult to replace; revenue and asset scale; strategic importance, etc. S&P Global (China) Ratings www.spgchinaratings.cn 6 A Closer Look at China's LGFVs: Guangxi April 22, 2020 We believe that most Guangxi LGFVs generally take on several functions, making them highly important to their local governments. Apart from Nanning, Liuzhou and Qinzhou, most Guangxi cities generally have only one city-level LGFV handling their infrastructure financing and investment business.