Xinhua Far East Changes Rating Outlook of Zhejiang Expressway from Stable to Negative

Xinhua Far East Changes Rating Outlook of Zhejiang Expressway from Stable to Negative

July 31, 2006

    HONG KONG, July 31 /Xinhua-PRNewswire/ -- Xinhua Far
East China Ratings today changed the rating outlook of
Zhejiang Expressway Co., Ltd ("Zhejiang
Expressway" or "the Company", HKSE: 0576;
LSE: ZHEH; ADR: ZHEXY) from stable to negative.  Its
domestic currency issuer credit rating of AA remains
unchanged.

    The outlook change was prompted by the RMB 600 million
acquisition of a 70.46% interest in Kinghing Securities
Co., Ltd. (Kinghing Securities) by the Company's
majority-owned subsidiary Zhejiang Shangsan Expressway Co.,
Ltd. (Shangsan Co).  Given the volatilities and capital
intensity in China's brokerage industry, Xinhua Far East is
concerned that the Company may be required to provide
substantial additional capital to revitalize the operation
of financially distressed Kinghing Securities and will
remain vulnerable to unknown contingent liabilities in this
acquired brokerage.  In addition, RMB 177 million out of the
RMB 600 million cash investment was contributed by Shangsan
Co. on behalf of other shareholders of Kinghing Securities.
 However, there is considerable uncertainty about timely
full repayment from these shareholders.

    As securities brokering is a new business line with no
relation to Zhejiang's core business, it will be an uphill
challenge for the Company to restructure and turn around
Kinghing Securities.  While the RMB 600 million acquisition
has enabled the Company to fully recover a RMB 587 million
treasury bond investment misappropriated by Kinghing
Securities and to obtain majority control in Kinghing
Securities, the subsequent restructuring and possible
recapitalization are likely to drain more resources from
Zhejiang Expressway before it can reclaim the value in this
investment.  In Xinhua Far East's opinion, while Zhejiang
Expressway is financially sound enough to fund the
acquisition and the relevant restructurings, this
investment will put pressure on the highly resilient credit
risk profile that is expected for the Company's AA rating. 

    The Company started investing in government bonds
through Kinghing Securities in 2001.  Kinghing Securities
allegedly pledged RMB587 million of treasury bonds owned by
Zhejiang Expressway for third party repo transactions
without prior notification to or consent of the Company. 
On the other hand, Kinghing Trust Investment Co., Ltd.
(Kinghing Trust), previously the largest shareholder of
Kinghing Securities, allegedly misappropriated funds from
Kinghing Securities.  With the collapse of Kinghing Trust,
Kinghing Securities had inadequate funds to settle the repo
transactions and thus there was high risk of the Company's
treasury bonds deposited in Kinghing Securities being
enforced as a security for the third party repo
transactions.  To avoid the potential loss of the
investment in these treasury bonds, the Company decided to
participate in the restructuring of Kinghing Securities
through an additional capital injection of RMB600 million
through its subsidiary, Shangsan Co.

    As part of the RMB 600 million cash injection, RMB 177
million are paid by the Shangsan Co. on behalf of five
shareholders of Kinghing Securities. However, one
shareholder has refused to repay the RMB 46 million capital
contribution made by Shangsan on its behalf.  Although three
of remaining four shareholders pledged their future
dividends from Kinghing Securities to repay the aggregate
amount of RMB 108 million due to Shangsan Co., it remains
highly uncertain that Kinghing Securities can be turned
around rapidly enough to generate sufficient dividends for
these shareholders to fully repay the amount due.

    As a result of the acquisition, the Company became the
ultimate controller of Kinghing Securities, exposing it to
the risks in the volatile securities market.  The Company
also faces challenges to manage a new business line
materially different from its core business of expressway
operation.  Even though the Company has stated its
intention to dispose of its interests in Kinghing
Securities in the end, there are uncertainties in finding a
suitable buyer and obtaining pertinent regulatory
approvals.

    Xinhua Far East also has concerns that there could be
as yet unidentified contingent liabilities in Kinghing
Securities, which had poor risk management and internal
controls in the past.  Moreover, Kinghing Securities is a
relatively small brokerage firm without a clear competitive
advantage, which may need further capital injections to
revitalize its business.  Both of these factors increase
the risks faced by Zhejiang Expressway.

    On the other hand, Xinhua Far East notes that the
Company's core business is growing steadily and remains
very resilient to economic volatility.  In 2005, the
Company's turnover reached RMB3.5 billion, a year-on-year
increase of 10.4%.  Meanwhile, the Company's financial
leverage is relatively low and its cash position is
abundant, which increases its ability to withstand risks
and pressures.  At the end of 2005, the Company's gross
debt to total capital ratio stood at 16.5%, and it held
RMB829 million in cash on its balance sheet.  Therefore, in
view of its very strong financial position and vibrant core
business, Xinhua Far East is leaving unchanged its issuer
credit rating of AA.

    Zhejiang Expressway is an infrastructure company whose
main business is investment in and development, operation
and management of the Shanghai-Hangzhou-Ningbo Expressway
and the Shangsan Expressway.  The Company and its
subsidiaries also carry out such related businesses as
automobile service, gas station operation and advertising. 
At the end of 2005, Zhejiang Communications Investment Group
Co., Ltd. was the largest shareholder, with a 56% stake in
the Company.

    Shangsan Co. is a subsidiary of Zhejiang Expressway,
which holds 73.625% of its shares.  

    Kinghing Securities is a securities brokerage firm
registered in Zhejiang Province.  It engages in business
through 20 operational branches and 16 sales branches,
which are mainly located in the Yangtze Delta region. 
Kinghing Securities' restructuring was approved by China
Securities Regulatory Commission in June 2006.

    Zhejiang Expressway is also a constituent of the Xinhua
FTSE Hong Kong Index and, as of market close on July 28,
2006, its total market capitalization and investable
capitalization were HK$20, 890 million and HK$8, 356
million respectively. 

    For the rating report summary, please visit
    http://www.xinhuafinance.com/creditrating .

    Note to Editors:

    About FTSE Xinhua Hong Kong Index 

    Xinhua FTSE Hong Kong Index comprises 'Red Chips',
ordinary HK listed stocks from the FTSE Developed Hong Kong
(large/mid cap) Index (in FTSE GEIS),'H' shares from the
current FTSE China Index(large/mid cap) and HSBC. The index
has been created to meet the needs from both international
investors and the anticipated needs of the domestic Chinese
institutional investor authorized to make overseas equity
investments (as expected under the QDII program).  For
daily data and further information, see
http://www.xinhuaftse.com . 

    About Xinhua Far East China Ratings

    Xinhua Far East China Ratings (Xinhua Far East) is a
pioneering venture in China that aims to rank credit risks
among corporations in China.  It is a strategic alliance
between Xinhua Finance (TSE Mothers: 9399), and Shanghai
Far East Credit Rating Co., Ltd. Shanghai Far East became a
Xinhua Finance partner company in 2003 and the first China
member of The Association of Credit Rating Agencies in Asia
in December 2003.

    Capitalizing on the synergy between Xinhua Finance and
Shanghai Far East, Xinhua Far East's rating methodology and
process blend unique local market knowledge with
international rating standards.  Xinhua Far East is
committed to provide investors with independent, objective,
timely and forward-looking credit opinions on Chinese
companies.  It aims to help investors differentiate the
credit risks among the corporations in China, thereby,
cultivating their awareness and promoting information
disclosures and transparency in China market. 

    For more information, see
http://www.xfn.com/creditrating .

    About Xinhua Finance Limited

    Xinhua Finance Limited is China's unchallenged leader
in financial information and media, and is listed on the
Mothers board of the Tokyo Stock Exchange (symbol: 9399)
(OTC ADRs: XHFNY).  Bridging China's financial markets and
the world, Xinhua Finance serves financial institutions,
corporations and re-distributors through four focused and
complementary service lines: Indices, Ratings, Financial
News and Investor Relations.  Founded in November 1999, the
Company is headquartered in Shanghai with 20 news bureaus
and offices in 19 locations across Asia, Australia, North
America and Europe.  

    For more information, please visit
http://www.xinhuafinance.com . 

    About Shanghai Far East Credit Rating Co., Ltd

    Shanghai Far East Credit Rating Co., Ltd. is the first
and leading professional credit rating company with
comprehensive business coverage in China.  It is an
independent agency established by the Shanghai Academy of
Social Sciences with the mission to develop internationally
accepted standards for capital market in China.  The company
is a pioneer in conducting bond-rating business in China. 
For years, it has been authorized by the Shanghai branch of
the PBOC to undertake loan certificate credit rating.

    Since establishment, it has rated over 1,000 corporate
long-term bonds and commercial papers, based on the
principles of objectivity, fairness and independence.  The
company has also maintained over 50% market share in the
loan certificate-rating sector in Shanghai for three
consecutive years.  With its strong local presence and
knowledge, it provides investors with unique and the most
insightful credit opinion. 

    For more information, see http://www.fareast-cr.com .

    For more information, please contact:    

    Hong Kong
     Joy Tsang
     Corporate & Investor Communications Director
     Xinhua Finance
     Tel:   [phone]
            [phone]
            [phone]
     Email: [e-mail]

    US
     Ms. Ishviene Arora
     Taylor Rafferty (IR/PR Contact in US)
     Tel:   [phone]
     Email: [e-mail]

SOURCE  Xinhua Far East China Ratings