Fitch Ratings has assigned Beijing Energy International Holding Co., Ltd. (BEIH) a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'A' with a Stable Outlook.

Fitch has also assigned a senior unsecured rating of 'A' to the company.

BEIH is rated one notch down from its 32% parent, Beijing Energy Holding Co., Ltd. (BEH, A+/Stable), based on a strong parent, weak subsidiary approach under Fitch's Parent and Subsidiary Linkage Rating Criteria.

We assess BEH has 'Medium' legal, strategic and operational incentives to support BEIH, which acts as a strategically important renewable-energy investment platform of BEH. It plans to account for around 73% of the group's renewable energy capacity target by end-2025.

Key Rating Drivers

'Medium' Legal Incentive to Provide Support: BEH guaranteed 36% of BEIH's debt issued at offshore and onshore holding companies as of June 2022. We regard the guarantees to be of 'Medium' coverage and permanence, as BEIH may increase external borrowings without parental support as its asset base expands. Our factor assessment also reflects sizeable internal loans provided by BEH to BEIH's project and onshore holding companies.

'Medium' Strategic Incentive to Provide Support: Our factor assessment is underpinned by BEIH's 'Medium' competitive advantage to its parent, which stems from its role in implementing the parent's energy-transition strategy. It targets to contribute 87% of BEH's renewable-energy installation in China's 14th five-year plan period of 2021-2025. BEIH also fulfils BEH's mandate of improving Beijing's energy structure. The company will play a leading role in investing in large renewable-energy base projects in Inner Mongolia and Jilin province, whose power will be transmitted to the capital city.

BEIH's rapid expansion leads to a 'High' assessment of the growth potential subfactor. However, we believe BEIH makes a 'Low' financial contribution to BEH due to its current small asset scale.

'Medium' Operational Incentive to Provide Support: Our assessment is underpinned by 'Medium' management and brand overlap, with a low weight assigned to 'Low' synergies from daily operations. BEH assigns BEIH's key management, including the chairman, Secretary of Discipline Inspection Commission, Deputy Party Secretary, CEO and CFO. In addition, BEIH's board is controlled by the parent and some board directors also perform senior managerial roles at the parent. The two entities share the same branding.

Fast Capacity Expansion: BEIH targets to increase its total solar and wind power capacity to 22 gigawatts (GW) by end-2025, from 4GW at end-2021. Capacity addition was 849 megawatts (MW) in 9M22 and management estimates new capacity of nearly 2GW in 2022. We believe strong growth in renewable energy is positive for BEIH's business profile, as renewable energy has no exposure to fuel-cost fluctuation and has better cash flow predictability than thermal power.

High Utilisation Hours: The utilisation hours of BEIH's solar power projects improved to 722 hours in 1H22, from 708 hours in 1H21, and surpassed the national average by 32 hours. Its wind power capacity recorded 1,308 utilisation hours in 1H22, higher than the national average by 154 hours. This reflects the company's good project location with better wind and solar resources. We expect future projects to have high utilisation hours, as BEIH continues to develop projects at favourable locations and many of its new projects will serve the Beijing-Tianjin-Hebei greater area, which has solid demand.

High Leverage on Debt-Funded Capex: We expect EBITDA net leverage to exceed 10x in 2022-2025 due to high capex intensity, which keeps free cash flow in negative territory. Nevertheless, we think BEIH has adequate financial flexibility, buoyed by solid access to loans from the parent and bank financing, aided by parental support.

BEIH is exploring financing sources to fund its capacity growth and plans to list an infrastructure securities investment fund by spinning off two project companies with 400MW of solar capacity. It will also issue asset-based securities and commercial paper programmes, with total registration size of CNY5 billion, with BEH undertaking the obligation to pay the shortfall if the underlying assets cannot be recovered or are impaired.

Derivation Summary

BEIH is rated one notch below its parent, BEH, due to 'Medium' legal, strategic and operational incentives for parental support under Fitch's Parent and Subsidiary Linkage Rating Criteria.

Key Assumptions

Installed capacity to reach 22GW by end-2025.

Stable capacity utilisation for existing capacity; we assume new projects will have higher utilisation hours than the national average to reflect their locations in better solar and wind power resource areas.

Stable tariffs at existing wind and solar farms, but decreasing tariff for new capacity due to the removal of subsidies.

Annual capex at around CNY9 billion-24 billion in 2022-2025.

RATING SENSITIVITIES

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

Strengthening incentive for BEH to support BEIH

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

Negative rating action on BEH

Weakening incentive for BEH to support BEIH

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate 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 four 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.

Liquidity and Debt Structure

Adequate Liquidity Under Strong Parental Support: BEIH had CNY11,634 million in bank and other borrowings due within one year at end-June 2022, which could not be fully covered by its CNY4,338 million in readily available cash on hand. However, we expect BEIH to maintain adequate liquidity due to strong financial support from the parent, including parental guarantees, large shareholder loans and the financing services provided by BEH's finance and leasing subsidiaries.

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