Hong Kong, July 11, 2022 — Moody’s Investors Service has assigned a first-time A3 issuer rating to Shandong Land Development Group Co., Ltd. (Shandong Land).
The outlook is stable.
“Shandong Land’s A3 rating reflects its strategic role in coordinating, managing and rationalizing land use in the province based on public policy targets and its close linkage with the Shandong provincial government,” says Cedric Lai, a Moody’s Vice President and Senior Analyst.
“The rating is also constrained by the evolving regulatory environment and Shandong Land’s evolving business model,” adds Lai.
RATINGS RATIONALE
Shandong Land’s A3 issuer rating is based on (1) the Shandong provincial government’s capacity to support (GCS) score of a1, and (2) Moody’s assessment of how the company’s characteristics affect the Shandong government’s propensity to support, resulting in a two-notch downward adjustment.
The assessment of the Shandong provincial government’s capacity to support reflects Shandong’s status as a strong province, one of the higher administrative levels in Moody’s assessment of the hierarchy of regional and local governments (RLGs) in China (A1 stable); and its relatively solid economic and fiscal profile, strong local state-owned enterprises (SOEs) and healthy local financial system.
The company’s rating reflects Shandong government’s propensity to support Shandong Land, which is based on (1) Shandong government’s effective 100% ownership and control in Shandong Land, (2) Shandong Land’s status as the sole provincial level platform to co-ordinate, manage and rationalize land resources in accordance with provincial land policies, mainly through swapping land use quota among cities, counties and rural areas in the province, (3) the track record of receiving government support, and (4) its relatively good access to funding from banks and domestic bond markets, given its status as a key local government financing vehicle (LGFV) in Shandong province.
However, the two-notch downward adjustment from Shandong government’s GCS score reflects Shandong Land’s: 1) evolving business model and expansion over the next several years that may involve more commercial activities and investments outside of Shandong province, which the company may not be able to receive timely government support as what the company receives for the public policy projects in Shandong province; 2) fast debt growth due to the large investment needs of its public policy projects, and 3) relatively smaller scale compared with other Shandong provincial-level platforms.
Due to rapid urbanization and fast economic development, Shandong province’s demand for construction land quota significantly outstrips supply. According to the national land policy, construction land refers to land that can be assigned for commerce, industrial, public facilities, infrastructure and social uses.
At the same time, the province needs to meet the national policy objective of balanced development to ensure that a significant proportion of the land in the province is reserved for arable use.
Therefore, the Shandong government mandates Shandong Land to redevelop land so that the company can turn eligible land into arable land or construction land, or reorganize scattered land parcels to generate additional arable land areas. In this way, Shandong Land can produce additional land quota to meet the development needs of the province.
In addition, Shandong Land trades the land quota between cities and counties within the Shandong province to ensure the best use of land for economic development and urbanization, while ensuring that it retains an acceptable proportion of arable land in the province.
Moody’s expects the company to continue receiving government cash payments in the form of operating subsidies, capital injections as well as government payments for land quota. During 2019-21, the company received RMB22.9 billion of government cash payments.
Moody’s believes that the national and provincial policies regarding land development will continue to evolve over the next several years in view of the importance of sustainable economic development and healthy development in the property market. At the same time, many LGFVs in China are undertaking more commercial activities to adapt to changing regulatory and funding requirements. Thus, Shandong Land’s business model may change and involve more commercial activities. While Moody’s expects Shandong Land will continue to play an important role in executing the provincial’s public policy targets in land resource management, the potential change in its business model can affect the mechanism of government support.
Shandong Land’s asset scale is relatively smaller compared with other provincial-level SOEs. However, Moody’s expects the company’s total assets to grow rapidly over the next two years considering the large investment pipeline for land consolidation projects.
Moody’s forecasts Shandong Land’s annual capital spending will be around RMB26 billion-RMB39 billion over the next 1-2 years, which will be partly funded by debt. Moody’s expects the company’s debt to grow to RMB30 billion-RMB45 billion over the next 12-18 months.
The rating also takes into account the following environmental, social and governance (ESG) factors.
Shandong Land bears high social risks because it implements public-policy initiatives in Shandong province. Demographic changes, public awareness and social priorities shape Shandong Land’s development targets and ultimately affect Shandong government’s propensity to support the company.
Governance considerations are also material to the rating, as Shandong Land is subject to oversight and reporting requirements to its owner RLG, reflecting its public policy role and status as a government-owned entity. Shandong Land is exposed to low environmental risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Shandong Land’s stable outlook reflects the stable outlook on China’s sovereign rating; Moody’s expectation that the Shandong government’s GCS score will remain stable, and that the control and oversight by the Shandong government will remain largely unchanged over the next 12-18 months.
Moody’s could upgrade the rating if (1) China’s sovereign rating is upgraded and Shandong’s GCS strengthens, which could arise from a significant strengthening in Shandong’s economic or financial profile or its ability to coordinate timely support; or (2) Shandong Land’s characteristics change in a way that strengthens the Shandong government’s propensity to support, such as:
– It receives more government payments consistently, such that dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a large share of its operational and debt-servicing needs especially over the next 2-3 years amid its fast expansion plan, or
– It becomes more strategically important to the Shandong government.
Moody’s could downgrade the rating if (1) China’s sovereign rating is downgraded or Shandong’s GCS weakens, which could arise from a significant weakening in Shandong’s economic or financial profile or its ability to coordinate timely support; (2) changes in Chinese government’s policies prohibit RLGs from providing financial support to LGFVs; or (3) Shandong Land’s characteristics change in a way that weakens the Shandong government’s propensity to support, such as:
– Its core businesses undergo material changes, including a substantial expansion into commercial activities that result in substantial losses or at the cost of public services, or
– Its debt and leverage rapidly increase without a corresponding rise in government payments, leaving the company reliant on high-cost financing, including through non-standard channels, or
– Its loans, guarantees or other credit exposures to external parties materially increase from current levels.
Established in 2015 and previously known as Shandong Land Reserve Development Group Co., Ltd, Shandong Land Development Group Co., Ltd. (Shandong Land) is 70% owned by Shandong State-owned Assets Supervision and Administration Commission (SASAC), 20% owned by Shandong Guohui Invt Hldg Grp Co., Ltd. (Baa2 stable) and 10% owned by Shandong Provincial Council for Social Security Fund.
Shandong Land is the sole provincial-level platform for land consolidation, developing and securing natural resources elements in Shandong. It is also involved in ecological restoration, green mining, characteristic agriculture, rural tourism characteristic town and industrial park development, to facilitate Chinese government’s initiative of rural revitalization and commonwealth.
In 2021, Shandong Land reported total assets of around RMB39.9 billion and revenue of around RMB10.4 billion.
The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The local market analyst for this rating is Yan Li, +86 (106) 319-6572.
REGULATORY DISCLOSURES
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Cedric Lai
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
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Ivan Chung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
