Wednesday, February 05, 2020 /05:40
PM / By Fitch Ratings / Header Image Credit: The Newyork Times
The coronavirus outbreak in China could raise the risk of negative rating impacts for Chinese highway operators, particularly if the health crisis is sustained over a long period, says Fitch Ratings. However, the effect of disruption stemming from epidemics on road traffic may be temporary, and we believe that the resilience of road operators to a short-lived shock would be relatively strong.
The ultimate ratings impact of the outbreak will depend on how severe and sustained the crisis proves to be. Fitch believes that this remains unclear at this stage. In Hubei province, numerous travel restrictions have been put in place, with some key expressway entries and exits from the province closed, public transport suspended, and private cars banned from the roads. However, traffic passing through Hubei is still flowing on inter-provincial roads. Restrictions have been particularly tight in Wuhan, where the virus was first detected, as well as a number of other major cities in Hubei province.
Fitch expects the large-scale travel restrictions and shutdown of business in Wuhan and other areas in Hubei to have dampened passenger and freight traffic on toll roads passing through Hubei. There is also likely to have been a broader impact on toll roads outside of Hubei, both because of Wuhan's role as a transport and industrial hub and because widespread public fear of contagion will have reduced travel in other parts of China as well. The Ministry of Transport has indicated that road passenger volumes over 10-30 January dropped by 18% year on year.
The authorities have not yet clarified how long travel restrictions will remain in place, and the prospects for the pace of recovery after they are lifted are also cloudy. During the SARS epidemic, China's highway traffic bottomed out in May 2003, after the first case was discovered in December 2002. Monthly passenger traffic and freight traffic in China in May 2003 was 46% and 24% lower, respectively, compared with pre-crisis levels, but returned to pre-crisis levels within five and four months respectively. Over 2003 as a whole, passenger traffic fell by 2%, but freight traffic posted 5% growth. Nevertheless, there are numerous factors that differ on this occasion compared with SARS, including the number of cases, the speed of the official response and prevailing economic conditions. Consequently, there may be significant differences in how the epidemic affects transport.
Fitch rates a number of Chinese toll road operators, including Yuexiu Transport Infrastructure Limited (YXT, BBB-/Stable), Shenzhen Expressway Company Limited (SZE, BBB/Stable) and parent Shenzhen International Holdings Limited (BBB/Stable). Among these, we expect YXT to be more directly hit. After its consolidation of three assets in Hubei that it acquired in November 2019, YXT has five toll roads in the province accounting for 52% of its total mileage. These assets are expected to generate about 45% of the firm's total EBITDA in 2020. In contrast, SZE has only a 70km stretch in Hubei, which contributes around 8% of EBITDA. Nevertheless, all the three companies have good financial cushions and healthy liquidity, which bolster their capacity to withstand short-lived shocks.
We believe that toll road operators are in general likely to be more resilient to the impact of the epidemic than some other sectors, such as airlines or travel and accommodation, partly because traffic volumes are likely to rebound quickly once the crisis eases. In YXT's case, a drop of over 10% in toll road revenues 2020, compared with our pre-epidemic base case forecast of no growth, could raise net leverage to a level that would be credit negative, although it would not necessarily imply a rating downgrade.