Hong Kong, July 30, 2020 -- Moody's Investors Service has affirmed the Baa1 issuer ratings of
China Metallurgical Group Corporation (CMGC) and its key subsidiary,
Metallurgical Corporation of China Ltd. (MCC).
In addition, Moody's has affirmed the Baa1 backed senior unsecured
ratings and the Baa2 backed subordinate rating on the bonds issued by
MCC Holding (Hong Kong) Corporation Limited and guaranteed by MCC.
The outlook on the ratings remains stable.
"The ratings affirmation reflects our expectation that CMGC will
maintain a stable business profile, grow its revenues, and
contain its capital expenditure and debt growth over the next 12 to 18
months," says Chenyi Lu, a Moody's Vice President
and Senior Credit Officer.
RATINGS RATIONALE
CMGC's Baa1 issuer rating reflects its standalone credit profile
and a three-notch uplift based on Moody's expectation that CMGC
will continue to receive strong support from the Government of China (A1
stable) through its parent, China Minmetals Corporation (Baa1 stable),
if times of need.
Moody's support assessment reflects (1) CMGC's status as a core subsidiary
of China Minmetals, accounting for 51%, 56%
and 45% of total assets, revenue and adjusted EBITDA respectively
at the end of 2019, (2) the integral and important role that CMGC
plays in the engineering and construction (E&C) businesses of China
Minmetals, which are strategically important to the Chinese government;
and (3) the government's strong ability to provide support, as reflected
in its A1 rating.
CMGC's standalone credit profile reflects the company's (1) long track
record, strong market position and large operating scale in the
Chinese E&C sector, particularly in the construction of steel
plants; (2) expansion into non-metallurgical construction,
which helps reduce its reliance on the matured metallurgical construction
sector; and (3) good access to domestic banks and capital market
financing.
However, CMGC's standalone credit profile is constrained by (1)
its exposure to the cyclical nature of property development and steel
industries; and (2) the execution and financial risks associated
with its large E&C and overseas mining projects.
CMGC recorded 15.9% growth in revenue in the first quarter
of 2020 and 21.9% growth in new orders in the first half
of 2020 compared to the same period last year, despite the temporary
disruptions caused by the coronavirus outbreak. The company's
order backlog/revenues was 2.8x at end of 2019, providing
good visibility for its expected revenues over the next two years.
Moody's expects the company to register 5% and 8%
revenue growth in 2020 and 2021 respectively.
That said, the company's EBITDA margins will decrease to around
6.8% in 2020-21 from 7.1% in 2019,
as it will gain more construction orders from infrastructure projects,
which typically have lower margins than the company's metallurgical
construction and engineering services.
But Moody's expects the company's adjusted debt/EBITDA will
be maintained at around 5.5x in 2020-21, supported
by company's prudence in containing its capital expenditure at around
RMB5 billion per annum and in maintaining its adjusted debt at around
RMB136 billion. Such level of leverage supports the company's
standalone credit profile.
MCC's Baa1 issuer rating reflects its standalone credit strength
and a three-notch uplift reflecting Moody's expectation that the
company will receive strong support from its parent, CMGC,
in times of stress.
The credit profiles of MCC and CMGC are closely linked, given that
MCC is the key operating subsidiary of the group, accounting for
over 97% of CMGC's assets and revenues at the end of 2019.
CMGC and MCC's issuer ratings also take into account the following
environmental, social and governance (ESG) considerations.
CMGC's resource development segment has elevated environmental risks.
They include pollution from mining and smelting, management of soil,
water and waste, and natural and man-made disasters such
as tailing dam failures and pit wall collapses. Nevertheless,
CMGC's mining businesses are small in scale and have a track record of
compliance with relevant regulations.
In terms of governance risk, Moody's has considered (1) CMGC's 100%
indirect ownership by the State-owned Assets Supervision and Administration
Commission under the State Council of China, which supervises the
company's operations and financials; and (2) the fact that
both CMGC and MCC have exercised prudence in managing their debt leverage
by limiting investments in BOT/PPP projects.
The stable outlook on CMGC reflects Moody's expectation that (1) the company's
credit metrics will be maintained at levels appropriate for its standalone
credit profile; and (2) its important role in China's metallurgical
and construction sectors, and the Chinese government's ability to
support the company through its parent, will remain intact.
The stable outlook on MCC mirrors that of CMGC.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if CMGC's standalone credit profile
improves and its parent, China Minmetals, is upgraded.
CMGC's standalone credit profile could improve if it achieves steady revenue
growth, stable profitability and debt reductions, such that
the company's adjusted debt/EBITDA falls below 4.5-5.0x
on a sustained basis.
An upgrade of CMGC's rating will trigger an upgrade of MCC's rating.
Moody's could downgrade CMGC's rating if the company's standalone
credit profile weakens or its parent, China Minmetals, is
downgraded.
CMGC's standalone credit profile could weaken because of a material deterioration
in its business or financial profile. Credit metrics indicative
of a weakening standalone profile include a fall in its order backlog,
lower profitability or an increase in debt, such that the company's
adjusted debt/EBITDA stays above 6.0x-6.5x on sustained
basis.
A downgrade of CMGC will trigger a downgrade of MCC's rating.
The principal methodology used in these ratings was Construction Industry
published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
China Metallurgical Group Corporation (CMGC) is engaged in the business
of engineering and construction, equipment manufacturing,
property development and resources development.
Headquartered in Beijing, CMGC is 100% owned by China Minmetals
Corporation, which is in turn fully owned by the State-owned
Assets Supervision and Administration Commission under the State Council
of China. In 2019, CMGC reported total revenue of RMB339
billion and total assets of RMB471 billion.
Metallurgical Corporation of China Ltd. (MCC) is the key subsidiary
of CMGC. MCC accounted of 99% and 97% of CMGC's
adjusted EBITDA and assets in 2019. MCC is one of the largest E&C
companies in China, and the market leader in the construction of
domestic steel plants. As of July 2020, MCC was 49.18%
owned by CMGC.
The local market analyst for these ratings is Jin Wu, +86 (212)
057-4021.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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