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Fitch Ratings has assigned Vietnam-based Hanoi Power Corporation (EVNHANOI) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' with a Stable Outlook.

Fitch Assigns Vietnam's EVNHANOI First-Time 'BB' Rating; Outlook Stable
EVNHANOI's rating is based on the consolidated credit profile of Vietnam Electricity (EVN, BB/Stable), which owns 100% of EVNHANOI, in line with Fitch's Parent and Subsidiary Rating Linkage Criteria. The consolidated rating approach is driven by strong integration of EVNHANOI's credit profile with that of its parent. Fitch assesses EVNHANOI's Standalone Credit Profile (SCP) at 'bb', the same as that of EVN and the Vietnam sovereign rating (BB/Stable).
EVN's SCP benefits from its position as the owner and operator of Vietnam's electricity transmission and distribution network, and the company's near 53% share of the country's installed generation capacity. Under Fitch's Government-Related Entities Rating Criteria, EVN's ratings will be equalised with that of the sovereign should its SCP weaken, provided the likelihood of state support remains intact.
KEY RATING DRIVERS
EVNHANOI's Strong Integration with EVN: EVN determines EVNHANOI's profits through a bulk-supply tariff setting mechanism. This bulk-supply tariff aims to cover EVNHANOI's costs and earn profits that allow the company to maintain operations and meet investment plans. EVN also appoints EVNHANOI's key management, approves its business and investment plan, oversees the subsidiary's financial management, and approves key executives' compensation packages. Around 20% of EVHANOI's total borrowings at end-2019 were guaranteed by EVN.
EVNHANOI's SCP Assessment: EVNHANOI's SCP is assessed at the same level as EVN's given the high influence the parent has on EVNHANOI's business plans, profitability and financial profile, though we believe EVNHANOI's financial profile is stronger than that commensurate for its credit assessment. EVNHANOI's SCP is supported by its dominant market position in electricity distribution in Vietnam's capital of Hanoi, its diversified counterparties and low receivables. EVNHANOI's credit profile is constrained by the regulatory framework's short history and political risks, and the short period of six months for which tariffs are set in the framework.
Diversified Counterparties, Low Receivables Risk: EVNHANOI's credit profile benefits from its stable and diversified customer base. More stable residential customers account for 57% of EVNHANOI's revenue and its top 20 customers account for around 2% of its total revenue. Lower counterparty risk is also reflected in EVNHANOI's high collection rates of well above 99% and low receivable days of around 5 days.
Restrictions on Tariff Increases; Lower ROE: EVN can increase retail electricity tariffs every six months, in line with rising production costs, in accordance with the regulatory framework that was introduced in August 2017. However, automatic adjustments are limited to 5%; with price increases of 5%-10% requiring approval from the Ministry of Industry and Trade, and larger increases requiring approval from the prime minister.
Nevertheless, we expect delays in implementing tariff increases in general and during the current challenging macro-economic conditions, which may adversely affect businesses and individuals, who may strongly oppose any tariff increases. EVN sets the major cost of electricity purchase, i.e. bulk-supply tariff for distribution companies, including for EVNHANOI, aiming to provide a modest level of profit. Historical return on equity for EVNHANOI has been around 1.6%.
High Capex After 2020: Fitch expects EVNHANOI's capex to remain high, after falling in 2020 due to the pandemic's impact on construction of certain projects. We expect EVNHANOI's capex to increase to VND6.9 trillion in 2021 from VND5.1 trillion in 2020 (2019: VND5.7 trillion). EVNHANOI's capex is mainly for enhancement of the distribution grid and building substations and transmission lines to improve the power supply capacity. Fitch estimates EVNHANOI's FFO net leverage to increase and stay at around 3x over the next three to four years (2019: 2.2x).
EVN's Strong State Linkages: Fitch sees EVN's status, ownership and control by the Vietnam sovereign as 'Very Strong'. The state fully owns EVN, appoints its board and senior management, directs investments and approves tariff hikes in excess of 5%. The support record and our expectations of state support for EVN are 'Strong'. The state has provided guarantees, step-down loans, loans from state-owned banks at preferential rates, subsidies for strategically important projects and tax incentives among others. We expect support to be available if needed, even though the government intends to cut direct support for state-owned enterprises and contain sovereign debt levels.
Strong State Incentive to Support EVN: Fitch believes the socio-political implications of a potential EVN default are 'Strong', as it would lead to service disruption in light of the company's entrenched position across the electricity-sector value chain. It would also be difficult to fund new power investments. We see the financial implications of a potential default by EVN as 'Very Strong', as this would significantly affect the availability and cost of domestic and foreign financing options for the state and government-related entities, as EVN is one of Vietnam's key borrowers.
DERIVATION SUMMARY
EVNHANOI's credit profile and rating assessment is driven by that of its parent EVN, considering the strong linkages between the two and the extensive influence EVN has on EVNHANOI's business plans, profitability and financial profile. Similar to EVN, PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable, SCP: bb+) and Korea Electric Power Corporation (KEPCO, AA-/Stable, SCP: bbb) are monopolies in their respective countries' electricity transmission and distribution sectors, and own and operate the majority of installed power-generation capacity. PLN and KEPCO's IDRs are equalised with those of Indonesia (BBB/Stable) and South Korea (AA-/Stable), respectively - per Fitch's Government-Related Entities Rating Criteria.
Fitch assesses PLN's linkages with the state and the state's incentive to support as 'Very Strong'. We assess KEPCO's status, ownership and control, and support record and expectations as 'Strong', while the state's incentives to support are assessed as 'Very Strong'. Meanwhile, we asses EVN's status, ownership and control and financial implications of default as 'Very Strong', whereas support, support record and expectations, along with the socio-political impact of default, are assessed as 'Strong'.

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