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Rating Action:

Moody's assigns first-time Ba2 CFR to ENN Ecological; outlook stable

 The document has been translated in other languages

06 Dec 2018

Hong Kong, December 06, 2018 -- Moody's Investors Service has assigned a first-time Ba2 corporate family rating (CFR) to ENN Ecological Holdings Co., Ltd.

The rating outlook is stable.

RATINGS RATIONALE

"ENN Ecological's Ba2 CFR reflects the favorable industry trends for its methanol production and clean energy related businesses, its long track record, and its diversified business portfolio," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

ENN Ecological benefits from favorable industry trends given its focus on expanding its methanol production and clean energy related businesses, namely energy construction and liquefied natural gas (LNG) production.

According to the National Statistics of China, annual methanol and natural gas consumption in the country exceeded production between 2012 and 2017, and grew at compound annual growth rates of 11% and 10%, respectively, over the same period.

The company has a strong operational track record, spanning about 20 years. Its longest operating segments -- energy construction and the manufacture of biopharmaceutical products -- have continuously grown in scale and market position since 1999.

Moody's expects the company's revenue to grow 25% in 2018 and 18% 2019, mainly driven by (1) growing demand for natural gas infrastructure construction, which should support growth in its energy construction business; and (2) its new methanol and LNG production capacity which commenced operations in 4Q 2018.

ENN Ecological's business has become increasingly diversified since 2013, supporting margin stability. Its portfolio includes methanol production and trading, energy construction, coal mining and trading, the manufacture of biopharmaceutical products, and LNG production. These operations have different business cycles and demand characteristics, thus partially mitigating margin volatility.

Moody's expects the company's adjusted EBITDA margin to improve slightly to around 20%-21% over the next 12-18 months from 19.3% for the 12 months ended June 2018, mainly owing to increasing revenue contribution from methanol production with better gross margins, the improving gross margin of its energy construction segment, as well as continued cost and expense controls.

ENN Ecological's CFR also factors in its improving financial profile and adequate liquidity.

Moody's expects the company's adjusted debt/EBITDA will improve to 2.5x-3.0x over the next 12-18 months from 4.1x for the 12 months ended June 2018 and 5.3x in 2017, driven by higher earnings from strong revenue growth and lower debt levels supported by improving free cash flow generation. This level of leverage is line with its Ba2 rating and will provide it with a financial buffer against the market volatility and execution risk associated with its investments and businesses.

"On the other hand, ENN Ecological's CFR is constrained by its modest operating scale, exposure to commodity price volatility, and China's evolving policies and regulations," says Lu, who is also Moody's Lead Analyst for ENN Ecological.

The company has a modest operating scale in each of its segments, limiting its ability to manage intense competition and commodity price volatility. The company's largest business segment -- chemical -- reported revenue of RMB3.2 billion in 2017, which is low when compared with its global chemical peers.

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

These risks are partially mitigated by the company's increasingly diversified business operations, long track record, and good financial discipline as part of ENN Holdings Investment Limited, its parent company.

ENN Ecological's CFR is also constrained by the proposed acquisition of a LNG business with an output of 3.25 billion cubic meter in the United States. The proposed transaction raises execution risks, including natural gas price volatility and contingent liabilities associated with four 20-year take-or-pay agreements, mainly related to liquefaction tolling and use of pipelines. These agreements include an annual committed payment of USD350-USD400 million to support the liquefaction of 3.25 billion cubic meter of natural gas per year for 20 years in Texas, the United States.

The proposed transaction is subject to shareholder and regulatory approvals. If completed, the transaction is expected to materialize in 4Q 2020, and would significantly boost the revenue contribution from the sale of LNG. ENN Ecological had an LNG production capacity of only 149 million cubic meter at the end of 2017, and the additional 3.25 billion cubic meter produced by the US business would thus both increase sales and the company's exposure to LNG price volatility.

This potential change in business mix and the associated execution risks are partially mitigated by: (1) the expected receipt from Toshiba Corporation (B1 stable) of a net cash consideration of USD806 million upfront to support the working capital needs for the overseas LNG business; (2) its strong downstream LNG customer base, including its related party ENN Energy Holdings Limited (Baa2 stable); and (3) its track record of managing growing operations of about 20 years.

The proposed transaction is in line with the company's strategy to obtain natural gas resources and grow its LNG business to meet domestic natural gas demand.

Moody's will monitor the progress of the proposed transaction and how the company manages the associated business risks upon execution.

The company's liquidity position is adequate. At the end of September 2018, it had cash, including restricted cash, of RMB1.8 billion. These cash resources and the company's expected operating cash flow of around RMB2.7 billion are sufficient to cover its short-term debt of RMB2.9 billion, bills payable of RMB136 million and estimated capital expenditure of RMB1.1 billion over the next 12 months.

Moreover, the company has good access to domestic bank facilities and the capital markets, supporting its liquidity requirements. In February 2018, the company completed an equity issuance of RMB2.3 billion to fund its operations.

The stable outlook reflects Moody's expectation that ENN Ecological will generate steady revenue and earnings growth, remain prudent in its investments and acquisitions, continue to lower its debt leverage, and maintain its adequate liquidity position to buffer against potential business volatility.

The rating could be upgraded if ENN Ecological (1) increases its operating scale with a diversified business portfolio while maintaining its profit margins through organic growth or acquisition; (2) demonstrates conservative financial and investment policies, as evidenced by solid liquidity and positive free cash flow on a sustained basis; and (3) improves its debt leverage, such that adjusted debt/EBITDA falls below 1.5x on a sustained basis, providing it with a solid financial buffer against potential business volatility.

On the other hand, the rating could be downgraded if (1) ENN Ecological's revenue growth slows or its profit margin narrows, due to high commodity price volatility or adverse changes in the government's policies and regulations; (2) aggressive debt-funded acquisitions or investments weaken its credit or business profile; or (3) adjusted debt/EBITDA fails to stay below 3.0x-3.5x on a sustained basis as its business grows over time.

The principal methodology used in this rating was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Founded in 1992 and headquartered in Hebei, China, ENN Ecological Holdings Co., Ltd has five main business segments: (1) chemical, mainly including methanol production and trading; (2) energy construction; (3) coal, mainly including mining and trading; (4) the manufacture of biopharmaceutical products; and (5) liquefied natural gas production.

ENN Ecological was listed on the Shanghai Stock Exchange in 1994. Company Chairman Wang Yusuo and his wife Zhao Baoju effectively co-owned 40.2% of the company at the end of June 2018.

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.

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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.

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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.)
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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