A Closer Look at China’s LGFVs: Sichuan May 21, 2020 Key Takeaways Primary Analyst Renyuan Zhang — Following a desktop analysis of 136 local government financing vehicles (LGFVs) in Sichuan Beijing Province, we believe the median indicative issuer credit quality of LGFVs in the province is +86-10 6516 6028 renyuan.zhang on a par with national median. @spgchinaratings.cn — We view that Chengdu has much stronger indicative support capability for LGFVs than other cities in the province, mainly benefiting from its stronger economy and fiscal position. Secondary Analysts Guangyuan, Ziyang, Bazhong, and Ya’an have relatively weaker indicative support capability. Yingxue Ren Beijing — We believe that the overall indicative issuer credit quality of the vehicles in Chengdu +86 10 6516 6037 is better than other regions, while the vehicles in cities like Suining and Bazhong have Yingxue.Ren relatively weaker overall indicative issuer credit quality. @spgchinaratings.cn Huang Wang Beijing To get a full picture of the overall credit quality of LGFVs in Sichuan Province, we carried out a +86 10 6516 6029 desktop analysis of 136 LGFVs in the region, using public information. Our sample includes LGFVs Huang.Wang at the city-level and below and subway companies, but excludes provincial-level LGFVs (like @spgchinaratings.cn transportation construction companies, investment holding companies and utility companies) Kexin Wang and city-level investment holding companies without operations in LGFV areas of business. Beijing The entities in the sample represent close to 88% of LGFVs with bonds outstanding in Sichuan, +86 10 6516 6033 covering 18 prefecture-level cities. We believe they offer a comprehensive reflection of the overall Kexin.Wang @spgchinaratings.cn indicative credit quality of LGFVs in Sichuan. We believe local government support is generally the most important factor when considering the indicative credit quality of LGFVs. In this report, we have analyzed the indicative importance of LGFVs to Sichuan’s municipal governments, and the municipal governments’ indicative capability to provide vehicles with support. We have also shown the indicative credit quality distribution of LGFVs across Sichuan. S&P Global (China) Ratings www.spgchinaratings.cn May 21, 2020 A Closer Look at China’s LGFVs: Sichuan May 21, 2020 Chart 1 Comparing Bonds Outstanding Among Sichuan LGFVs and Nationwide 18,000 16,000 14,000 12,000 10,000 8,000 490.2 billion RMB 6,000 100 Million RMB 4,000 2,000 0 Hunan Yunnan Hainan Jiangsu Sichuan Shandong Chongqing Hubei Guangdong Henan Fujian Guizhou Shaanxi Guangxi Shanghai Jilin Xinjiang Shanxi Hebei Gansu Liaoning Mongolia Inner Qinghai Zhejiang Tianjin Beijing Anhui Jiangxi Heilongjiang Ningxia Tibet Note: Data as of December 31, 2019. Source: Wind, S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. 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: Sichuan May 21, 2020 On the National Level: Median Indicative Issuer Credit Quality of Sichuan LGFVs on A Par with National Median Sichuan Province is located in the southwest of China and on the upper reaches of the Yangtze River, with an area of 486,000 square kilometers, ranking fifth in the country. It has 21 cities and a population of approximately 83 million permanent residents as of the end of 2019. Sichuan is an important province in west China with a large economy. In 2019, it generated about 4.7 trillion RMB in GDP, ranking sixth among all provincial-level governments. GPD per capita was 55,000 RMB in 2019, slightly lower than the median of all provincial level government in the country. In 2019, the general public budget revenue was about 407.1 billion RMB, higher than the median of all provincial level government, among which tax revenue was about 288.9 billion RMB. We believe that the median indicative issuer credit quality of the 136 LGFVs in Sichuan is on a par with that of the nationwide sample of 1700 LGFVs, while the proportion of vehicles with relatively strong indicative issuer credit quality is smaller than that of the nationwide sample. We believe the main reason is that the indicative support capability of municipal governments in Sichuan for LGFVs is polarized, among which Chengdu has much better indicative support capability than other cities. Chart 2 Indicative Credit Quality: Comparing LGFVs in Sichuan and Nationwide [BBB]*category [BB]*category [A]*category Sichuan China [B]*category [AA]*category and 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. S&P Global (China) Ratings www.spgchinaratings.cn 3 A Closer Look at China’s LGFVs: Sichuan May 21, 2020 Within the Province: Many LGFVs in Chengdu Have Average or Above-Average Indicative Issuer Credit Quality in the Province Our analysis found that the business and financial risk profiles of LGFVs are largely similar, and 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 believe that differences in the degree of support largely stem from variations in the indicative support capabilities of local governments and LGFVs’ different levels of indicative importance to their relevant local authorities. Analysis of Local Governments’ Indicative Support Capability We believe the indicative support capability of local governments in Sichuan is polarized, with Chengdu having much better indicative support capability than other cities. Meanwhile, the differences between the indicative support capabilities of other cities are much smaller than the gap between them and Chengdu. We believe that Chengdu has much better support capability than other cities, mainly due to its stronger economic strength, larger size of fiscal revenue, and better fiscal balance ratio. Guangyuan, Ziyang, Bazhong, and Ya’an have relatively weaker indicative support capability, in our view. The chart below shows our view of the indicative support capability of local governments for LGFVs across Sichuan. The darker the color, the stronger the indicative support capability for LGFVs, and vice versa. Chart 3 Varied Indicative Ability to Support Within the Province Guangyuan A'ba Bazhong Mianyang Nanchong Dazhou Deyang Ganzi Chengdu Suining Guang'an Ziyang Meishan Ya'an Neijiang Stronger Zigong Leshan Yibin Luzhou Weaker Liangshan Note：Areas in gray were not included Panzhihua in this study. Source: S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. S&P Global (China) Ratings www.spgchinaratings.cn 4 A Closer Look at China’s LGFVs: Sichuan May 21, 2020 We have come up with our views on the indicative support capability in the chart above after assessing the economic strength, fiscal strength, and debt burden of the cities.