HONG KONG (S&P Global Ratings) Feb. 4, 2020--S&P Global Ratings said today the novel coronavirus outbreak has already had a severe impact on the transportation infrastructure sector in China. We anticipate the ripple effects on transportation will be more significant and enduring than in the spread of the severe acute respiratory syndrome (SARS) outbreak in 2003.
"The new coronavirus outbreak will undermine the credit strength of many Chinese infrastructure operators in 2020," said S&P Global Ratings credit analyst Gloria Lu. "The impact on ratings depends on the extent to which government or parent support is provided, given the exceptional circumstances".
Passenger transport has plummeted in recent weeks. Over the 10-day lunar new year holiday that began this year on Jan. 24, passenger volumes on major means of transport combined dropped more than 70% compared with the holiday period of 2019. This includes air, rail, road, and water transport.
China has invested massively to develop a well-connected transportation infrastructure network over the past two decades. While this greatly improves connectivity and propels economic and social development, it can also contribute to a more rapid dissemination of epidemic diseases. The new coronavirus was discovered in Wuhan in December 2019 and is now in every Chinese province, and also in a number of other countries, including the U.S.
The impact on transport operators is more severe than during the SARS of 2003 because of unprecedented measures taken to contain the spread of the new coronavirus. Chinese local governments have halted nearly all transportation in and out of the virus' epicenter, Wuhan, along with other major cities in Hubei province. Other regions also implemented stringent quarantine measures to restrict cross-regional travel. Moreover, individuals are choosing to stay home, and delay or cancel trips, to avoid contamination. This is what led to a near population standstill in most parts of the country during the recent holidays.
"All means of transportation in China are feeling the impact of reduced social and economic activities and, in our view, this is likely to contract traffic volumes for the first half of 2020," said S&P Global Rating credit analyst Laura Li. "Passenger traffic will be more depressed than freight."
In particular:
- Air passenger traffic is likely to get hit harder than other types of transportation. This is in part because flying in China is often discretionary, for leisure purposes. For major Chinese hub airports, international flights will drop more than domestic flights. More than 40 airlines have already cancelled routes to and from China. The World Health Organization (WHO) declared the coronavirus as a global health emergency, which has led some countries to deny entry to Chinese travelers.
- The impact on toll roads will be moderate-to-high, subject to asset locations (with Hubei hit hardest), the mix of traffic (with passenger flow more vulnerable than freight transport), and the duration of the outbreak. Among the toll-road companies we rate, Yuexiu Transport Infrastructure Ltd. (BBB-/Stable/--) has the highest exposure to Hubei province. Also, over the recent holiday, authorities extended toll-free days for passenger cars. This will also hurt profitability for operators.
- Sea ports are relatively less affected because of their low association with passenger traffic. Nevertheless, we expect a negative impact on export from disruptions to China's supply chain and manufacturing--due to production halts, extended holidays, or delayed return of workers from holidays due to travel restrictions. That said, the throughput of some ports may benefit from recent progress in the trade negotiations between China and the US. China is committed to purchase goods worth of US$200 billion during 2020-2022 from the U.S., under the "Phase I" trade agreement signed in January.
We anticipate Chinese central governments will roll out measures to support virus-stricken sectors, including transportation, to limit the fallout of the health crisis. Such support may include tax holidays, operating subsidies, and widened funding access. However, we do not expect much in the way of direct support. This is because local and regional governments (LRGs) own most transport operators, and in a scenario of widespread infection, LRGs could face more fiscal challenges, including decreased tax revenues and structurally slowing growth, as well as higher medical and social-related costs due to the virus outbreak.
We will be monitoring traffic flows of the rated operators to understand the degree of negative impact of the situation on cash flow and margin. At the same time, given the government-owned nature or group structure of all of these companies, we will also examine the level of support provided by government or parent group as a component to the rating.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analysts: | Gloria Lu, CFA, FRM, Hong Kong (852) 2533-3596; gloria.lu@spglobal.com |
| Laura C Li, CFA, Hong Kong (852) 2533-3583; laura.li@spglobal.com | |
| Kendrew Fung, Hong Kong (852) 2533-3540; kendrew.fung@spglobal.com | |
| Secondary Contact: | Richard M Langberg, Hong Kong (852) 2533-3516; Richard.Langberg@spglobal.com |
| Research Assistant: | Rick Yoon, Hong Kong |
| Media Contact: | Ning Ma, Hong Kong (852) 2912-3029; ning.ma@spglobal.com |
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