Fitch Affirms Shanghai Pudong Development Group at 'A'; Outlook Stable

(The following statement was released by the rating agency)

Fitch Ratings-Hong Kong-17 March 2021:

Fitch Ratings has affirmed Shanghai Pudong Development (Group) Co., Ltd.'s (SPD) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A'. The Outlook is Stable.

SPD was established in 1996 under the approval of the Shanghai municipal government. The company is positioned as a functional platform to fuel the development of Shanghai's Pudong New Area, which accounted for around one-third of the city's total gross regional product. SPD had CNY161.7 billion in total assets and CNY75.5 billion in net assets as of September 2020.

Key Rating Drivers

'Very Strong' Status, Ownership and Control: SPD remains fully owned by the state. The board is the company's highest decision-making body and all directors, except the employee representative, are directly appointed by the government. Fitch's 'Very Strong' assessment mainly takes into account the government's strong control and oversight of the company's operational and financing activities.

'Strong' Support Record: SPD has a solid record of receiving government support, which helps to facilitate the company's business development and improve its financial flexibility. The company received an average of CNY231 million a year in government subsidies during 2015-2019, and CNY83.3 million in the first three quarters of 2020, which mainly comprised tax rebates and other special funds for various purposes.

'Strong' Socio-Political Implications of Default: SPD is a comprehensive urban development and operating platform focused on the Pudong New Area, which remains a key driver of the city's economic development. The company has undertaken a major share of Pudong's infrastructure construction and public-housing projects. SPD also provides a wide scope of public services such as rainwater and sewage treatment, landscaping and urban river maintenance, which further strengthens its functional role.

'Strong' Financial Implications of Default: SPD's role of driving the Pudong New Area's development since its inception results in the public's perception of strong operational and financial ties between

the company and the government. SPD also remains an active issuer in the domestic bond market. Fitch believes a default by SPD would have strong repercussions on the creditworthiness of Shanghai and drive up the funding costs of other local government-related entities in the region.

'bb' Standalone Credit Profile: SPD's Standalone Credit Profile (SCP) is assessed at 'bb', based on a 'Midrange' revenue defensibility, a 'Midrange' operating risk assessment and SPD's financial profile. The assessment reflects SPD's strong funding access, ample liquidity as well as balanced debt-maturity profile. Fitch believes the government's direct fiscal support, especially for infrastructure construction projects, will alleviate the company's funding pressure. SPD had a Fitch-adjusted net debt to EBITDA of 9.0x and cash interest coverage of 1.5x at end-2019. Fitch expects the company's leverage and coverage to stay at similar levels over the forecast period of 2020-2024.

Derivation Summary

SPD is rated under Fitch's Government-Related Entities Rating Criteria and credit-linked to our internal assessment of the creditworthiness of the Shanghai municipality. The linkage is reflected in the government's 100% ownership, oversight and ongoing support of the company and the socio-political and financial impact on the government if SPD defaults.

SPD's Issuer Default Rating is derived from the four factors under the above criteria and the 'bb' SCP under Fitch's Public Sector, Revenue-Supported Entities Rating Criteria.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Fitch's internal credit view of the Shanghai municipality, as well as a reassessment of SPD's four factors under Fitch's Government-Related Entities Rating Criteria, which may result from Fitch's perception that the government's incentive to provide legitimate support to SPD has increased, would result in positive rating action.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade may result from a weakening of the socio-political or financial implications of an SPD default, or a weaker assessment of the government's support record, or a dilution of the government's shareholding or control. Negative rating action would also stem from a potential deterioration of Shanghai's fiscal strength and debt-servicing capability.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

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.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Shanghai Pudong Development (Group) Co., Ltd.; Long Term Issuer Default Rating; Affirmed; A; Rating Outlook Stable
----; Local Currency Long Term Issuer Default Rating; Affirmed; A; Rating Outlook Stable

Contacts:
Primary Rating Analyst
Terry Gao, CFA, CPA
Managing Director
+852 2263 9972
Fitch (Hong Kong) Limited
19/F Man Yee Building 60-68 Des Voeux Road Central
Hong Kong

Secondary Rating Analyst
Ark Huang,
Associate Director
+86 21 6898 7997

Committee Chairperson
Guido Bach,
Senior Director
+49 69 768076 111

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com

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