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Global Credit Research - 18 Oct 2010
Hong Kong, October 18, 2010 -- Moody's Investors Service has today assigned a provisional (P)B1
corporate family rating to Hidili Industry International Development Ltd
('Hidili'). Moody's has also assigned a (P)B1
senior unsecured rating to proposed bonds to be issued by Hidili.
The outlook for both ratings is stable. This is the first-time
Moody's has assigned ratings to Hidili.
The provisional status of the ratings will be removed upon completion
of the bond issue. If the transaction fails to go ahead,
or if the final bond issue size materially differs from Moody's
expectation, the ratings will be under pressure in view of the company's
weak liquidity and the resulting refinancing risk.
"The provisional B1 rating reflects Hidili's ownership of
well located coking coal assets, and integrated operations with
a low cost base, which supports its good profitability,"
says Renee Lam, a Moody's Vice President and Senior Analyst.
"At the same time, the rating also captures Hidili's
small scale and high customer concentration, and its short operating
history at its current scale," says Lam.
"The company's profitability is highly sensitive to the cyclical
coal prices and demand from the downstream steel industry, though
Moody's notes the solid demand for coking coal expected over the
near term from the Chinese steel manufacturers," says Lam.
"Moody's also expects the recent consolidation of the Chinese
steel industry -- by closing down the small-size, inefficient
steel mills -- will have limited impact on Hidili as its major customers
are large state-owned steel manufacturers," says Lam.
"In the next 2 years, Hidili aims to more than double its
production from the 2.8 million tons in 2009. Such an aggressive
growth plan is subject to uncertainty and entails execution risk."
"Its leverage is high, as measured by adjusted debt/EBITDA
of 5.7x in 2009, though declined to 4.4x in 1H10,
and the B1 rating factors in the expectation that the company will lower
its leverage to about 4x in the next 12-18 months, through
production growth from its newly acquired mines," adds Lam.
The stable outlook incorporates Moody's expectation that Hidili
will achieve its production growth and de-leveraging targets within
its budget and planned time frame.
A near-term rating upgrade is unlikely given the company's
current high financial leverage, and the company is still ramping
up its production to de-leverage.
Over time, the rating may be upgraded if the company succeeds in
implementing its expansion plans and in ramping up its production for
de-leveraging. Consistent positive free cash flow will also
benefit the credit profile. Financial indicators that Moody's
would consider for an upgrade include adjusted debt/EBITDA consistently
Moody's would be concerned if the company failed to de-leverage
as planned, due to 1) Hidili's failure to achieve its production
targets at the projected costs and within the projected time frame;
2) cyclical movements in coal prices and costs; 3) a downturn in
China's steel industry that dampened upstream coking coal demand;
or 4) aggressive, debt-funded acquisitions. Any major
safety or environmental issue, or regulatory changes, materially
affecting the company's cash flow would also be negative for the
rating. Such downward pressure could be evidenced by adjusted debt/EBITDA
consistently above 4-4.5x.
The principal methodology used in rating Hidili was Global Mining Industry
rating methodology published in May 2009. Other methodologies and
factors that may have been considered in the process of rating this issuer
can also be found on Moody's website.
Hidili is a vertically integrated coal mining enterprise in southwest
China that supplies coking coal products to the domestic steel industry.
Hidili was listed on the Hong Kong Stock Exchange in September 2007.
Its major shareholder is Mr. Xian Yang, who has a 50.7%
stake (as of June 30, 2010).
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
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and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's Investors Service Hong Kong Ltd.
Moody's assigns first-time B1 rating to Hidili
24/F One Pacific Place
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