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Rating Action:

Moody's assigns first-time Ba2 ratings to Liansu

26 Apr 2011

Hong Kong, April 26, 2011 -- Moody's Investors Service has assigned a Ba2 corporate family rating to China Liansu Group Holdings Limited.

Moody's has also assigned a provisional (P)Ba2 rating to Liansu's proposed senior unsecured USD notes.

The outlook for the ratings is stable.

This is the first time that Moody's has assigned ratings to Liansu.

RATINGS RATIONALE

"Liansu's Ba2 rating reflects the company's leading market position, as the largest plastic pipes and plastic fittings manufacturer in China," says Ken Chan, a Moody's Vice President and Senior Analyst.

"Liansu differentiates itself against its competition by its greater geographic diversity, with 12 operational production facilities spread across nine provinces, as well as its numerous product offerings," says Chan.

"The company has an edge resulting from its ability to provide better service and faster product delivery, and with lower transportation costs."

Given its long established brand and customer relationships, Liansu's leading position will be a difficult challenge for its competitors for the medium term.

"Another factor supporting the Ba2 ratings is the favourable demand for Liansu products from the infrastructure and real estate industries," says Chan, add that "Moody's expects that these industries will continue to grow over the medium term, supported by the Chinese government's vast infrastructure spending and favorable low-income housing policies."

Strengthening piping standards by the authorities will also enhance demand for Liansu's quality products, which will facilitate the company's expansion into the replacement market.

"The Ba2 rating takes into consideration the diversification of Liansu's end-user industries, which range from drainage to telecommunications. This makes Liansu's performance somewhat less vulnerable to a downturn in a single industry," adds Chan.

"However, the rating also reflects Liansu's exposure to fluctuations in the costs of raw materials such as plastic resins -- for example, PVC, PE, and PP-R -- which account for around 85-90% of its total COGS," says Chan, also the lead analyst for Liansu.

Liansu aims to mitigate profit margin volatility by pricing its products on a cost-plus basis. This is in general achievable under normal market conditions as (1) the cost of piping is not significant for its clients, and (2) the reliability and quality of its product are the main concerns of its customers. Incremental rises in product prices are reflected after one or two months.

Liansu's ratings are constrained by its fast growth strategy. It has grown rapidly over the last few years -- sales indicate a compound growth rate of 46% over the past three years -- and has invested RMB1.6 billion in capital expenditures. And Moody's expects Liansu to keep on with its rapid capacity expansion plans, which could result in execution risk, especially if volume growth in the new regions falls short of expectations over the next two years.

Moreover, such volume-driven growth requires a certain amount of cash and working capital support, which could strain the company's bank credit limits.

However, Liansu does have adequate liquidity -- cash on hand of RMB1.5 billion as of December 2010 -- which provides a buffer for any downside to its operations.

In addition, Moody's expects the company's debt/EBITDA to reach around 1.5x and its EBITDA/interest, 9-10x, over the next two years, which will position Liansu well within the Ba2 rating.

The outlook for the ratings is stable, reflecting Moody's expectation that the company will maintain its market leadership and current utilization rates for the next two years.

The ratings are unlikely to be upgraded in the near term. However, the ratings could be pressured upward over time if the company can (1) expand its capacity and still maintain its overall utilization rates over the medium term; (2) achieve stable sales growth while maintaining its profitability, with gross margin exceeding 20%, over the medium term; and (3) maintain its strong credit metrics, such that debt/EBITDA remains consistently below 1.5x.

The ratings could be pressured downward if the company's financial position weakens, such that debt/EBITDA rises above 2.5-3.0x and the gross margin declines below 15%, resulting in (1) an inability to pass on the rises in raw material costs to its customers; (2) greater pressure on its working capital, leading the company to raise a substantial amount of high-cost funding; or (3) a more aggressive debt-funded expansion plan or dividend payout ratio that weakens the balance between leverage and liquidity.

The principal methodology used in rating China Liansu Group Holdings Limited was the Global Building Materials Industry Industry Methodology, published July 2009.

Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009 (and/or the Government-Related Issuers methodology,published July 2010).

Founded in 1996 and listed on the Hong Kong Stock Exchange in June 2010, China Liansu Group Holdings Ltd is one of the largest plastic pipes and pipe fittings manufacturers in China. It has 12 operational production facilities in nine provinces, with a design annual production capacity of 1.15mtpa by the end of 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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 Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Hong Kong
Ken Chan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
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.
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JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time Ba2 ratings to Liansu
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