Fitch Affirms Taiwan High Speed Rail at 'AA+(twn)'; Outlook Stable.
The rating on THSRC is based on Government-Related Entities Rating Criteria, Rating Criteria for Public-Sector, Revenue-Supported Debt, in conjunction with the National Scale Ratings Criteria. Peer comparison and the Taiwan national ratings scale are used to derive the national rating of THSRC.
THSRC is the sole high-speed train service provider in Taiwan. It started operation in 2007.
KEY RATING DRIVERS
Status, Ownership and Control: THSRC is majority owned by the state, with the state and state-backed shareholders holding more than 60% at end-1H18. Less than half of the shares were held directly by the government, and transfer or disposal of the government-backed shares are constrained by a financial resolution plan approved in June 2015. The resolution plan was aimed at stabilising the company's financial condition to avoid the termination of the Construction and Operation Agreement (C&O Agreement) between THSRC and the Ministry of Transportation and Communications (MOTC), which dictates the high-speed railway's construction, operation and transfer arrangement.
THSR's largest shareholders include the MOTC, China Aviation Development Foundation, China Steel Corporation and Taiwan Sugar Corporation. The government-backed parties currently hold 60% of the seats on the board of directors and have significant influence over THSRC's financial and operational activities. There are another three independent directors on the board. The control attribute is assessed at 'Moderate' because of THSRC's limited liability corporate nature and majority state ownership, but government monitoring and control is less intense than for government-related entities (GREs) with 'Strong' control attributes.
Support Track Record and Expectations: The government has provided THSRC support several times since its establishment, with the biggest example being the financial resolution plan in 2015. As part of the plan, the state injected TWD30 billion of capital into THSRC to avert the termination of the C&O Agreement. The plan also included an extension of the concession period to 70 years from the original 35 years, extension of the syndicated loan repayment period, and a promise from MOTC to secure THSRC's market share by disallowing competing railways before 2063. THSRC also received a one-off transportation subsidy TWD12.1 billion. Following the resolution plan, THSRC has been able to turn around its financial situation, and Fitch does not expect THSR to receive subsidies or capital injections while financial performance continues to be strong.
Socio-Political Implications: Disruptions in high-speed rail service would have a temporary social impact, but travellers would be able to substitute other means of transport, such as conventional rail and the freeway that links Taipei to Kaohsiung. However, the government's moratorium on new routes and additional railway operators protects THSRC's oligopoly market position, especially in the segment for inter-city, long-haul travel of more than 200km.
Financial Implications: According to the Tripartite Agreement and Syndicated Loan Agreement, if THSR fails to meet its scheduled loan repayments, MOTC will need to assist THSRC. Should the C&O Agreement be terminated, MOTC will assume the remaining tranche A of the syndicated loan balance, which was equivalent to about 95% of THSRC's total debt at end-2017. This mechanism enhances THSRC's ties with the government. Any credit events that remain unsolved for a prolonged period are likely to have a significant impact on MOTC.
Growing Market Share: THSRC's share of the inter-city transportation market has increased steadily, with the company accounting for 57.7% of weekday long-haul travel by passenger volume in Taiwan and 54.6% on the weekends in 2016. THSRC has successfully attracted more daily commuters, which Fitch sees as sustainable, low-volatility demand. Based on data compiled by MOTC, Fitch calculated that THSRC's share annual passenger volume on inter-city routes in 2017 was 13.92%, with the rest of the market split between Taiwan Railway, which operates the conventional rail network, and inter-city buses. Total passenger volume for Taiwan Railway increased by only 1.06% in 2017, based on MOTC data. In comparison, passenger volume for THSRC expanded by 7.04% in 2017. Taiwan Railway and the Taipei-Kaohsiung freeway remain THSRC's primary rivals.
Unlike peers rated at the highest end of the national ratings scale, THSRC does not dominate its market, leading Fitch to rate the company a notch lower than 'AAA(twn)'. Nonetheless, THSRC enjoys strong financial integration with the government, which supports its rating.
Standalone Credit Profile: Fitch assesses that THSRC's standalone credit profile based on a 'Mid-Range' revenue defensibility, a 'Mid-Range' operating risk assessment, and a 'Weaker' financial profile.
'Mid-Range' Revenue Defensibility: Although demand for THSRC is 'Strong', this is offset by 'Mid-Range' pricing characteristics. THSRC's passenger volume has increased robustly since 2007 and its market share has improved steadily. We expect demand growth to be sustainable in the medium term. The 'Mid-Range' pricing reflects inflation adjustments allowed in its pricing formula and the presence of some price-setting power, but this is offset by moderate price elasticity of demand, which was evident when prices were adjusted in 2013 and 2015.
'Mid-Range' Operating Risk: THSRC has demonstrated its ability to control operating costs, considering the large amount of variable costs associated with the operation. It has a reasonable capex plan for 2018-2020, which reflects the lower amount of investment required for this phase of operation and the moderate potential volatility of operating costs.
'Weaker' Financial Profile: THSRC had net profit of TWD5.34 billion in 2017, with return on assets at 1.21%. During 2014-2017, the net debt/EBITDA ratio rose as high as 12.39x in 2014 before falling to 8.35x in 2015 due to a one-off government subsidy. It rose to 9.32x in 2017. Fitch expects net debt/EBITDA to stabilise at 8x-9x during 2018-2020 with a gradually declining trend. The EBITDA coverage ratio stood at 4.24x at end-2017, and is likely to remain at 4x-4.5x.
Any shift in the perceived legal, operational and strategic ties between THSRC and the government will trigger a rating assessment on the national rating of THSRC.
Any changes in Financial Resolution Plan or the C&O Agreement that are unfavourable for THSRC would trigger reassessment of the ratings of THSRC.