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China freezes highway tolls to boost economy but move comes at a cost

Toll road operators and local governments face indefinite loss of revenue

TOKYO -- Beijing's decision to suspend tolls on all roads, bridges and tunnels in China to spur economic activity has left toll operators reeling, with potentially serious impact on local governments.

The Ministry of Transport announced on Saturday that the suspension would start less than two days later, at midnight Monday, and "last until the epidemic prevention and control operation is over." The main objective, the ministry said, is to "stand by companies to return to work and production, in order to provide vigorous support for the overall economic and social stability."

The move comes at the expense of China's toll road operators, which include more than 20 publicly traded companies listed in Hong Kong, Shanghai and Shenzhen, as well as several non-listed companies that issue market-traded bonds.

"With immediate zero cash inflow from road operations, toll-road operators could face difficulties in debt servicing and meeting fixed expenditures, especially those with heavy debt burdens," said S&P Global Ratings credit analyst Laura Li. She described the policy as "drastic and unprecedented," as it is different from the toll-free periods occasionally implemented over long holidays.

China has one of the longest paid highway networks in the world, covering 168,100 km as of the end of 2018 and bringing in 555.24 billion yuan ($79.1 billion) in annual revenue, according to ministry data released last August.

Simple arithmetic indicates an average revenue loss of $217 million per day due to Beijing's policy.

The operators are predictably downbeat about the prospect of receiving no toll revenue for an indefinite period of time. NWS Holdings, a Hong Kong-listed unit of New World Development, said in a statement on Monday that the policy "will inevitably have an immediate impact on the results" of its road business. NWS Holdings operates 15 toll roads in China covering a total of 740 km.

Shenzhen Investment Holdings Bay Area Development, which operates two joint ventures in Guangdong Province, issued a similar warning. Because toll income is the primary revenue source for the joint ventures, the toll suspensions "will inevitably have a negative impact on the business performance of the Group," the Hong Kong-listed company said in a statement on Monday.

So far, no mainland-listed toll road operators have filed public statements on either Shanghai or Shenzhen stock exchanges, but like their Hong Kong-listed peers, they are feeling investors' displeasure. Since Feb. 3, when the market reopened from a prolonged Lunar New Year break, until Thursday, the share prices of all toll road operators have fallen, including Shenzhen Investment Holdings Bay Area Development (down 10.6%) and Jiangsu Expressway (down 8.3%) in Shanghai, and China Merchants Expressway Network & Technology Holdings (down 6.3%) in Shenzhen.

The transport ministry said "complementary safeguard policies" would be released separately, but did not elaborate and there has been no follow-up so far. At a meeting on Thursday chaired by Transport Minister Li Xiaopeng, son of former Premier Li Peng, the ministry reiterated the need to "alleviate corporate burden" but said only that complementary policies were needed "as soon as possible."

Ivy Poon, senior analyst at Moody's Investors Services, expects compensatory measures to include direct government subsidies, extending concession periods, and allowing local banks to extend credit facilities. However, nothing is solid at this point, and for Moody's, too, the new policy is "credit negative" as companies' financial profiles will be weakened and "the strain on cash flow will also tighten their liquidity and increase refinancing risk in the short term."

Although Moody's did not name any specific companies, S&P said Gansu Provincial Highway Aviation Tourism Investment Group will face "significant liquidity risks" among its rated Chinese toll road operators. The American agency now gives an investable "triple B flat" rating with a stable outlook, but the uncertainty on cash flow brought to focus its 9.5 billion yuan of bonds maturing in a year, with an overall 20.5 billion yuan short-term maturities as of the end of September.

"The timeliness and extent of government support are key credit drivers for toll operators under such special circumstances," Li at S&P said. She also highlighted the importance for local governments, as the operators are "largely directly or indirectly owned by governments and have high systemic importance."

Some local governments that run toll road operators have begun to utilize the newly sanctioned "epidemic prevention and control bonds" for a quick replenishing of cash reserves. Hubei Provincial Communications Investment, a wholly owned subsidiary of the provincial government at the epicenter of the contagion, said in a prospectus issued on Thursday that it will procure 2 billion yuan through this special purpose bond, with a tenor of 270 days. Like many other previous issuers, the Hubei toll road operator will use 90% of the proceeds to pay back its existing debts.

Unilaterally suspending all tolls could spur economic activity and help the country bounce back from the impact of the epidemic, as the ministry hopes. But drastic measures can sometimes have unwanted side effects, as reports coming out of Wuhan, which has been locked down for weeks, have shown.

At least seven listed mainland toll road operators issued positive earnings alerts for 2019 before the Lunar New Year break, but the good news seems to have worn off. Hubei Chutian Smart Communication, 35% owned by Hubei Provincial Communications Investment, said on Jan. 21 that its net profit likely rose 60-90% last year to between 711 million and 844 million yuan, owing to a 10.61% increase in toll revenue. No official statement from the company has come out since, but its share price in Shanghai was down 9.2% as of Thursday, while the index dropped just 0.7% during the same period.

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