The start of 2022 brings about more ESG bond issuances and opportunities for investors. This morning, Guangzhou Development District Holding Group Limited (“GDDHDG”) is looking to tap debt capital market through a 5-year Green bond issuance. The bond has an initial price guidance (“IPG”) of 3.30%.
The senior, unsecured bond is expected to be rated ‘Baa1’ / ‘BBB+’ by Moody’s / Fitch respectively. Net proceeds from this bond issuance will be used to finance certain eligible green projects that are defined in the company’s Green Finance Framework. PwC and the Hong Kong Quality Assurance Agency have reviewed and certified the Green Finance Framework.
Such green projects include green buildings, projects that improve energy efficiency, prevent or lower waste and pollution, renewable energy infrastructure and clean transportation systems.
Projects will be selected in accordance with the Green Bond Principles 2021 released by International Capital Market Association, or the Climate Bonds Standard v3.0 issued by the Climate Bonds Initiative, or the Green Bond Endorsed Projects Catalogue (2021 Edition) jointly announced by the People’s Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission.
GDDHDG (the bond issuer) is a state-owned financial services and investment platform in Guangzhou, China. Guangzhou Development District Administrative Committee owns 90% of the company’s shares while the Department of Finance of Guangdong Province owns the remaining 10%. The group is supported by capital injections, government subsidies, government grants, share transfers and tax returns from state entities.
There are 4 principal business activities of the issuer – (i) heat and power supplies (which accounted for 43.5% of 1H21 operating revenue), (ii) science park construction and management (9.5%), (iii) real estate development (5.3%) and (iv) other businesses (41.7%).
The issuer has a strong asset base with growing revenue and profits over the last few years. Total assets increased from RMB 47.7b in 2018 to RMB 109.3b at 30 June 2021. Net assets also grew steadily from RMB 25.1b to RMB 39.6b during the same period. Meanwhile, in spite of the pandemic, GDDHDG made RMB 3.73m of revenue in 1H21, which exceeded its RMB 3.70b of combined revenue in 2018.
Although earnings growth may seem good, the company's gross profit margin fell back to 20% (2019 and 2020: 38% and 28%), of which a large part of the operating profit came from changes in the fair value of investments during the period, so the overall performance was not satisfactory.
From a credit standpoint, the company had RMB 49.6b of total debt as of the end of June last year. Cash reserves on hand were about RMB 24.3b and the net debt ratio was 64%, and the leverage performance was average.
The company's EBITDA/interest expense of 2.9x in the first half of 2021 is reflected in Fitch's standalone rating of only ‘B’. However, as a city investment company in Guangzhou, the local government has been providing sufficient financial support to GDDHDG.
In the first half of 2021, the amount of government subsidies and funds injected to the company reached RMB 910m. Its government backing also allows GDDHDG to continue issuing bonds in China, and most of its credit lines are from China's large state-owned banks, and its overall financing capacity is not bad.
Considering the relatively healthy financial situation of the Guangzhou Municipal Government, coupled with the credit ratings assigned by Moody's (‘Baa1’) and Fitch (‘BBB+’) respectively, we believe that the company will continue to issue bonds at a low cost and raise funds, with a controllable risk of default.
The IPG for the new 5-year bond is about 3.3%. Referring to other bonds with similar rating of ‘BBB+’, this new bond is obviously attractive and worth considering for investors, but it should be noted that the final price guidance is likely to tighten from the 3.3% level.
Declaration: For or specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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