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Rating Action:

Moody's assigns first-time B2 to Southern Energy Holdings

 The document has been translated in other languages

20 Jun 2019

Hong Kong, June 20, 2019 -- Moody's Investors Service has assigned a first-time B2 corporate family rating (CFR) to Southern Energy Holdings Group Limited.

At the same time, Moody's has assigned a B2 senior unsecured rating to Southern Energy's proposed USD notes.

The outlook is stable.

The proceeds from the proposed notes will be used by Southern Energy to refinance its existing indebtedness and for general corporate purposes.

The bond rating reflects Moody's expectation that Southern Energy will complete the bond issuance upon terms and conditions that Moody's will find satisfactory.

RATINGS RATIONALE

"Southern Energy's B2 CFR reflects its high-quality anthracite coal reserves, strong margins and operating cash flow generation," says Shawn Xiong, a Moody's Assistant Vice President and Analyst.

Southern Energy is an anthracite coal mining company which produces high-quality anthracite coal. Anthracite coal is characterized by high fixed carbon, low ash, low sulfur and low volatiles. These factors, combined with the company's low cost of production, has translated into strong margins, with its adjusted EBITDA margin ranging between 54% and 60% over the last three fiscal years ended 31 December 2016 - 2018.

Over the next 12-18 months, Moody's expects that the company's revenue will grow at around 8% and adjusted EBITDA margin remain around 50%, under Moody's pricing assumption of an average selling price for anthracite coal of RMB560 per tonne.

Southern Energy also benefits from its strong ability to generate operating cash flow. Because of the high-quality of its anthracite coal products, the company usually receives prepayments or payments on the day of deliveries. This situation significantly reduces working capital requirements. Such prompt payments, combined with the company's strong margins translates into strong operating cash flow generation.

Moody's also points out that the company's ownership is evolving. Government ownership currently stands at around 23%, and could potentially increase to around 43%, if a proposed transaction to acquire a 20% stake from Lavender Row Limited, a company owned by Mr. Xu Bo, succeeds.

While the company is likely to benefit from its partial ownership by the Hezhang county and Bijie City government through receiving operational support from the government, including better access to funding, Moody's will monitor any change in business and investment strategy.

"Southern Energy's CFR is constrained by its small absolute scale relative to its larger rated global peers, single commodity concentration, significant investment needs, and exposure to the inherent volatility in commodity prices," adds Xiong.

Southern Energy has a small absolute scale, with an annual nameplate production capacity of around 1.35 million tonnes at 31 December 2018. The company reported revenue and adjusted EBITDA of around RMB641 million and RMB346 million respectively for 2018. It owns three producing mines, the Weishe, Lasu and Luozhou mines, with each demonstrating a nameplate annual production capacity of around 450,000 tonnes.

At the same time, the company remains exposed to volatile commodity prices, even though its high-quality anthracite coal reserves are likely to lessen its exposure to large price fluctuations.

Furthermore, Moody's expects the company to incur significant capital spending over the next 12-24 months using a combination of operating cash flow and proceeds from proposed bond issuance, as Southern Energy looks to develop its fourth mine, the Anlang mine.

As a result, Southern Energy's credit metrics will weaken from their current solid levels. Moody's expects Southern Energy's adjusted debt-to-EBITDA to increase to 3.5x to 4.0x for 2020 from the low 0.6x in 2018, under Moody's pricing assumption of an average RMB560 per tonne compared to an average RMB598 per tonne for 2018.

From an environmental, social and governance perspective, Moody's has made the assessment below.

Firstly, Moody's views the global mining industry as facing elevated emerging environmental risk, including issues related to soil and water pollution. In China, non-compliance with environmental and safety standards could potentially result in large fines, suspension of production or the total loss of license to operate. Moody's points out that the company has had some safety incidents at its mines in the past but has since rectified the situation.

Moody's also explains that Southern Energy currently holds the appropriate licenses to operate and its production volume is approved by the government. It has also incurred capital spending in upgrading its systems and facilities, including installing the appropriate ventilation system and automatic gas level detection system in its underground mines, as well as the appropriate water treatment systems.

Secondly, the company is exposed to regulatory risks, stemming from China's evolving government policies and environmental regulations. These risks could raise its operating costs and capital spending levels, as it seeks to comply with changes in environmental and safety standards.

Thirdly, Southern Energy demonstrates concentrated ownership, with Mr. Xu Bo and Mr. Xiao Zhijun owning a total 46% stake in the company. This situation is partially mitigated by Southern Energy's status as a listed and regulated entity, as well as the fact that four out of seven of its board directors are independent.

Southern Energy's liquidity is good. The company's unrestricted cash balance of RMB189 million at 31 December 2018 and Moody's projected cash flow from operations of RMB180-RMB190 million over the next 12 months are adequate to cover its short-term debt of RMB142 million and likely capital spending of about RMB115 million over the next 12 months.

Southern Energy's senior unsecured bond rating is not affected by subordination to claims at the operating company level, because Moody's does not consider as material, especially because Moody's expects that the majority of claims will remain at the holding company level.

However, Southern Energy is exposed to legal subordination risk, because the majority of its current borrowings are on a secured basis. Downward pressure on the bond rating could emerge, if the company does not succeed in paying down most of the current secured borrowings using the proceeds from the issuance of bonds.

The stable ratings outlook reflects Moody's expectation that Southern Energy will continue to generate steady revenue and earnings, and the company will successfully complete the development of its Anlang mine. Moody's also expects that Southern Energy will maintain a prudent financial policy and adhere to sound corporate governance and environmental standards as it expands.

What Could Change the Rating -- Up

The ratings could experience positive momentum if (1) Southern Energy successfully completes and ramps up production at its Anlang mine on schedule; (2) materially increases its scale and coal reserves; (3) maintains adjusted debt/EBITDA below 2.5x on a sustained basis; and/or (4) maintains adjusted EBITDA/interest above 4.0x on a sustained basis.

What Could Change the Rating -- Down

Moody's could downgrade the ratings if (1) Southern Energy experiences significantly weaker revenue, earnings and liquidity; (2) experiences large debt-funded acquisitions or significant execution risks; (3) adjusted debt/EBITDA exceeds 4.5x on a sustained basis; or (4) adjusted EBITDA/interest coverage is less than 3.0x.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Southern Energy Holdings Group Limited, headquartered in Guizhou, is a Chinese anthracite coal miner. At 31 December 2018, it had three producing mines with an annual nameplate production capacity of around 1.35 million tonnes.

The company listed on the Hong Kong Stock Exchange in 2016.

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.

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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.

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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.

Shawn Xiong
AVP-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

No Related Data.
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