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S&P Affms China Overseas Land & Invstmt Rtg; Off Watch.

TOKYO--(BUSINESS WIRE)--Standard & Poor's CreditWire 9/21/98-- Standard & Poor's today affirmed its triple-'B'-minus corporate credit rating of Hong Kong-based China Overseas Land & Investment Ltd. (COLI). The rating was removed from CreditWatch, where it was placed on June 23, 1998. The outlook on the rating is negative.

The rating affirmation takes into consideration COLI's close ties with majority shareholder China State Construction & Engineering Corp. (CSCEC), a major state-owned enterprise at the ministerial level in the People's Republic of China (PRC). The affirmation also reflects COLI's focused business strategy, which centers around efforts to preserve its core competence in construction and property businesses and enlarge its sources of recurring income. These factors mitigate the company's relatively modest position in Hong Kong's volatile property development market and insulate its financial profile to some extent from current difficulties in Hong Kong and throughout the region.

As CSCEC's principal overseas listed vehicle, COLI benefits from support from the parent company. COLI obtains steady cash flow in its construction operations by means of subcontracts from CSCEC which provide a 7% guaranteed return in Hong Kong. CSCEC remains committed to the viability of its subsidiary, and will continue to facilitate COLI's investment opportunities in the PRC.

COLI in recent years has accelerated its diversification into infrastructure operations on the mainland, which are typically expected to generate U.S. dollar-denominated minimum fixed returns over an average investment period of 15 years. Such infrastructure projects, along with construction operations and a modest portfolio of property investments, form a stable base of recurring income. This base is expected to expand further over the next few years. To a large extent, however, cash flows from these operations are ultimately subject to regulatory and economic conditions in the PRC and the financial capacity of CSCEC and other Chinese partners.

COLI's largest source of revenues and profits continues to be proceeds from property development both in Hong Kong and on the mainland. The company's market position in Hong Kong is modest, lacking a sizable low-cost land bank. Meanwhile, its exposure to the higher-risk PRC market is likely to increase. As a result, cash flows from the segment will continue to demonstrate high volatility in line with cyclical trends in both markets.

COLI's financial profile is expected to worsen somewhat during the current property market downturn in Hong Kong. Although net leverage has consistently been below 30%, total borrowings rose 74% year-on-year in 1997. Against this increased debt burden, funds from operations are expected to remain largely unchanged at between HK$800 million and HK$900 million in 1998 and 1999. Consequently, both earnings and cash flow protection measures are likely to remain weak until at least 2000.


The extremely difficult operating environment in Hong Kong property markets and potential deterioration in economic conditions on the mainland could cause COLI's financial profile to worsen to a greater extent than currently anticipated. Meanwhile, in light of economic uncertainties in the PRC, CSCEC's strength and the level of support the parent provides to COLI could decrease, Standard & Poor's said. --CreditWire
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Publication:Business Wire
Date:Sep 21, 1998
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