S&P downgrades China Railway Construction outlook to negative

Investing.com -- S&P Global Ratings has revised its outlook on China Railway Construction Corp. Ltd. (CRCC) to negative from stable, while affirming its ’A-’ long-term issuer credit rating.

The rating action, announced on Friday, reflects S&P’s view that CRCC will face difficulties restoring its financial strength over the next two years amid challenging industry conditions.

S&P expects CRCC’s financial leverage to remain high over the next 12-24 months due to intense competition and tight funding conditions affecting certain project owners. This comes despite anticipated improvements in margin and cash flows from project mix optimization, cost cutting, and enhanced cash collection efforts.

Operating conditions in China’s engineering and construction sector are expected to remain challenging through 2026, primarily due to a prolonged property market downturn and tightened regulation on public-private-partnership projects. The sector’s new orders intake declined by 2% in the first quarter of 2025, following a 5% contraction in 2024.

Despite these headwinds, S&P believes CRCC will achieve modest business growth as state-owned E&C firms gain market share from private players. The company’s solid construction contracts backlog of RMB 4.3 trillion at the end of 2024 provides growth visibility, equivalent to 4.6 times its E&C segment revenue in 2024.

S&P forecasts CRCC’s revenue will grow by 1%-2% in 2025, with project execution expected to accelerate in the second half of the year amid increasing issuance of local government special purpose bonds.

The rating agency expects CRCC’s EBITDA margin to rise to 7.5%-8.1% in 2025-2026, up from 6.4% in 2024, supported by an improving project mix and stronger cost control measures. The company’s ratio of funds from operations (FFO) to debt is projected to improve to 10%-12% in 2025-2026, compared with 8.1% in 2024.

S&P could lower CRCC’s rating if its FFO-to-debt ratio remains below 12% or if EBITDA interest coverage falls close to 3x on a sustained basis. Conversely, the outlook could return to stable if the company achieves deleveraging with its FFO-to-debt ratio improving sustainably above 12%.

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