Hong Kong, February 26, 2018 -- Moody's Investors Service has assigned a first-time B2 corporate
family rating (CFR) to Dongling Group Inc. Co.
Moody's has also assigned a B3 senior unsecured rating to the proposed
USD notes to be issued by Dong Bao International Company Limited and guaranteed
by Dongling.
The bond rating reflects Moody's expectation that Dongling will complete
the bond issuance on satisfactory terms and conditions, including
proper registrations with the State Administration of Foreign Exchange
in China (A1 stable).
The ratings outlook is stable.
The company plans to use the proceeds from the proposed issuance for general
corporate purposes.
RATINGS RATIONALE
"The B2 CFR reflects Dongling's leading market position in
zinc and steel trading in China, underpinned by its long operating
track record, diversified counterparty network and prudent working
capital management," says Chenyi Lu, a Moody's
Vice President and Senior Credit Officer.
Founded in 2000, Dongling is one of the largest zinc and steel trading
companies in China (A1 stable). Dongling traded 1.9 million
tons of zinc in 2016 and 1.8 million tons in the first nine months
of 2017, representing 32% and 42% of China's
annual zinc production over the same period.
In 2016, the Dongling sold approximately 6.7 million tons
of steel products, making it the largest supplier of steel products
in China, according to data from Mysteel Research Institute.
The company benefits from a diversified customer and supplier base,
with its top 5 suppliers and buyers accounting for not more than 12%
of sales.
The company also maintains a prudent working capital management strategy,
providing it with adequate liquidity to support the commodity trading
business. Between 2014 and September 2017, its reported accountable
receivables days remained below 7 days, while its reported accounts
payable days were around one to two months.
"However, Dongling's CFR is constrained by the inherent
risks in China's commodities sector, execution risks associated
with its expansion into new metal products, and limited access to
funding," says Lu, also Moody's Lead Analyst for
Dongling.
Dongling's earnings and cash flow are highly exposed to the cyclical
commodities industry. The company's key products --
non-ferrous metal, steel and coal could also experience increased
volatility amid intensifying policy initiatives to improve air quality
and environmental standards in these sectors.
The company's strategy to expand its trading metals to aluminum
and copper can help reduce its revenue concentration in zinc and steel.
However, its expansion into these two competitive and fragmented
trading markets also raises considerable execution and financial risks.
The company's limited access to funding is reflected by the collateral
and external guarantees required for its two onshore bond issuances.
As of 30 September 2017, RMB3.5 billion or 99.7%
of its bank loans were supported by security pledges or external guarantees.
The company's liquidity position is weak. The company's
cash balance of around RMB8.5 billion as of 30 September 2017 was
insufficient to cover its short-term debt of RMB3.9 billion
and bills payable of RMB4.9 billion. In addition,
approximately RMB4.6 billion in cash was pledged against this debt.
Including bills payable and contingent liabilities in its adjusted debt
figures, and adding 20% of readily marketable inventories
in cash figures, Moody's forecasts the company's adjusted
net debt/EBITDA to remain at 3.0x-3.5x in the coming
12-18 months, compared to 3.7x in 2016 and 3.4x
for the 12 months ended 30 June 2017. This level of leverage is
low for a B2 rating, but is counterbalanced by its small scale,
high industry cyclicality and limited funding access.
The senior unsecured rating is one notch lower than the CFR because of
the risk of structural and legal subordination. This risk reflects
Moody's expectation that the majority of claims will be at the operating
subsidiaries' level, and will have priority over claims at the holding
company.
The stable outlook reflects Moody's expectation that Dongling will
maintain its leading market position in China's zinc and steel trading
market, and that it will manage its liquidity position prudently
without further deterioration.
An upgrade in the near term is unlikely, given the company's
small scale and concentration in a small number of commodities.
Nevertheless, Moody's would consider upgrading the ratings
over the medium term if Dongling: (1) continues to expand the scale
of its EBITDA and fixed assets; (2) successfully expands its product
offerings beyond zinc and steel; (3) improves its access to funding.
The ratings would come under pressure if Dongling shows (1) declining
sales and/or a weakening market position; (2) a deteriorating profit
margin and weakened liquidity due to increased competition, poor
working capital management or aggressive financial policies; and
(3) rising leverage.
Credit metrics indicative of downward rating pressure include adjusted
net debt/EBITDA above 4.0x-4.5x and adjusted debt/capitalization
above 70% on a sustained basis.
The principal methodology used in these ratings was Trading Companies
published in June 2016. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Established in 2000 and headquartered in Baoji in Shaanxi Province,
Dongling Group Inc. Co. engages in the trading of zinc,
lead, steel and coal. The company is also involved in non-ferrous
metal smelting, non-ferrous metal concentrate mining and
coal mining.
The company is 57.1% owned by Shaanxi DongLing Industrial
Company Employee Share Ownership Association (SDLI) and 42.6%
owned by DongLing Village Committee. Mr. Li Heiji is the
founder and the general manager of Dongling, and owned 3.2%
shareholding through SDLI.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
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.
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.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
