Moody’s cuts China Tourism Group outlook to negative

On Monday, Moody’s Ratings has affirmed the A3 issuer rating and Baseline Credit Assessment (BCA) of baa2 for China Tourism Group Corporation Limited (CTG). Additionally, Moody’s has confirmed the A3 backed senior unsecured rating on the USD bonds issued by Sunny Express Enterprises Corp., guaranteed by CTG. However, the outlook on all ratings has been revised to negative from stable.

Moody’s decision to shift CTG’s outlook to negative is driven by projections that the company’s deleveraging efforts will be protracted due to slower economic growth, which is expected to suppress consumer spending, particularly on discretionary items. Despite a modest recovery in tourism, CTG’s plans to reduce leverage are anticipated to extend beyond initial expectations.

The affirmation of CTG’s A3 rating is based on the expectation that the company will sustain a solid cash balance, providing a cushion against macroeconomic challenges. Moody’s anticipates that CTG will continue to liquidate its property holdings, manage its debt levels wisely, and benefit from strong support from the Chinese government.

CTG’s A3 issuer rating reflects the company’s BCA of baa2 and accounts for a two-notch uplift due to the high likelihood of extraordinary government support. This support is based on factors including the government’s full ownership of CTG, its key role in providing travel document services, its strategic importance in China’s travel and duty-free sectors, and its part in the government’s domestic consumption stimulus strategy.

The company’s baa2 BCA is supported by its strong brand presence, increasing demand for leisure travel in China, and a robust financial position. However, these positives are offset by a weakened revenue due to a slow recovery in duty-free sales and earnings, and exposure to China’s prolonged property market weakness.

CTG’s duty-free sales dropped by 16.4% in 2024 compared to the previous year. Despite this, Moody’s forecasts an approximate 5% increase in CTG’s duty-free revenue and EBITDA over the next two years, supported by the resurgence of international travel and the opening of new duty-free stores in 2025.

The tourism sector, encompassing hotels, travel agencies, attractions, and cruises, is expected to experience double-digit growth in 2025, propelled by strong travel activity during China’s Spring Festival. CTG’s focus on property asset monetization is expected to continue, as evidenced by a 23% reduction in inventory from RMB 60 billion at the end of 2022 to around RMB 46 billion by June 2024.

Moody’s estimates that CTG’s gross leverage was over 5.0x at the end of 2024, which is weak compared to peers at the same rating level. However, the forecast indicates that leverage will approach 3.0x in the next 12-18 months due to a recovery in the duty-free segment, successful property asset monetization, and modest capital expenditure.

CTG’s significant cash reserves have allowed the company to navigate a challenging operating environment. The adjusted net debt/EBITDA ratio is estimated to be around 2.0x for 2024 and is expected to decline to between 1.0x and 1.6x over the next two years.

CTG’s strong cash balances and deposits, coupled with anticipated solid cash flow from operations, are projected to cover capital expenditures and short-term debts over the next 12 months. The company’s liquidity is further enhanced by a centralized treasury system and its strong relationships with state-owned banks and access to domestic capital markets.

An upgrade of CTG’s rating is currently unlikely due to the negative outlook. A revision to a stable outlook could occur if CTG’s business and financial profile improve, with sustained adjusted debt/EBITDA below 3.0x. Conversely, a downgrade could happen if government support diminishes or if CTG’s BCA weakens, particularly if the adjusted debt/EBITDA does not trend toward 3x in the next six months.

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