Hong Kong, September 24, 2019 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
the proposed USD notes to be issued by China Hongqiao Group Limited (B1
positive).
The rating outlook is positive.
The bond rating reflects Moody's expectation that China Hongqiao will
complete the bond issuance upon satisfactory terms and conditions,
including proper registrations with the National Development and Reform
Commission and the State Administration of Foreign Exchange in China (A1
stable).
The proceeds from the proposed issuance will be used by China Hongqiao
for refinancing and general working capital purposes.
RATINGS RATIONALE
"The proposed issuance will not impact China Hongqiao's B1 corporate family
rating or the positive outlook on the rating, because most of the
proceeds will be used to refinance existing debt, while the issuance
will also improve the company's debt maturity profile," says
Roy Zhang, a Moody's Assistant Vice President and Analyst,
and also Moody's Lead Analyst for China Hongqiao.
The company successfully managed through a major capacity cut implemented
by the Chinese government in 2017. China Hongqiao's capital expenditure
needs have since declined significantly, because the supply side
reform has made it difficult for China Hongqiao and its industry peers
to add new capacity.
The company's integrated business model and equity placement have also
helped mitigate the impact of the capacity cut.
China Hongqiao's total reported debt declined to RMB78.5
billion at the end of June 2019 from RMB82.9 billion at the end
of 2018, because the company used cash on hand to pay off several
onshore and offshore bonds in 1H 2019.
Moody's expects that China Hongqiao's leverage will range between 3.5x
and 4.0x over the next 12-18 months; a result which
is solid for its current rating category.
China Hongqiao's liquidity is strong. Its cash on hand of RMB25.7
billion as of 30 June 2019, together with Moody's forecast
of the company's operating cash flow for the next 12 months,
are sufficient to cover its total short-term debt of RMB27.2
billion at the end of June 2019 and capital spending and dividend needs.
China Hongqiao's B1 corporate family rating reflects the company's leadership
position in aluminum production in China, vertically integrated
business model, long operating history, as well as advanced
and low cost production facilities.
On the other hand, the rating is constrained by the regulatory risks
and cyclicality associated with China's aluminium industry, resulting
in volatile credit metrics.
The positive rating outlook reflects China Hongqiao's increased capacity
to reduce debt, supported by positive free cash flow generation
and improving liquidity.
The rating also takes into account the following environmental,
social and governance considerations.
First, the company's bauxite mining, power generation,
alumina refinery and aluminium smelting operations are exposed to high
environmental and safety risks. However, these risks are
somewhat mitigated by its operational track record and continuous investment
in and improvement in related processes and facilities to meet higher
standards.
Second, on the governance front, the company has a track record
of changing auditors, while its ownership is concentrated in its
key shareholder, Mr. Zhang Shiping and his family,
who together held a total 70% stake in the company at the end of
2018. These risks are partially mitigated by the higher board oversight
exercised through the presence of strategic minority shareholder,
CITIC Group Corporation (A3 stable).
The B2 senior unsecured bond rating is one notch lower than it would otherwise
be due to structural subordination risk. This risk reflects the
fact that the majority of China Hongqiao's claims are at its operating
subsidiaries and have priority over its senior unsecured claims at the
holding company in a bankruptcy scenario.
Upward rating pressure could emerge if the company (1) maintains sound
corporate governance standards as it changes auditors, as well as
operational stability, after its capacity cuts; (2) reduces
its total debt and adjusted debt/EBITDA to below 3.5x-4.0x
on a sustained basis; and (3) maintains its cash to short-term
debt above 1.0x.
On the other hand, the rating outlook could return to stable if:
(1) its operations weaken as a result of an industry downturn or adverse
regulatory changes; (2) it fails to adhere to prudent financial management
and sound corporate governance standards; (3) its cost competitiveness
and market position deteriorate; (4) there is a material weakening
in its credit metrics, with adjusted debt/EBITDA rising above 4.5x;
or (5) its liquidity profile deteriorates.
The principal methodology used in this rating was Steel Industry published
in September 2017. Please see the Rating Methodologies page on
www.moodys.com for a copy of this methodology.
Founded in 1994 and headquartered in Zouping, Shandong Province,
China Hongqiao Group Limited is the largest aluminium manufacturer in
China as well as globally by production volume. The company listed
on the Hong Kong Stock Exchange in March 2011.
At the end of 2018, China Hongqiao Group Limited was 70.04%
owned by Chairman Mr. Zhang Shiping and 10.11% owned
by CITIC Group Corporation. The company posted revenue of RMB90
billion in 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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.
Roy Zhang
Asst Vice President - Analyst
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.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
