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Rating Action:

Moody's changes ENN Ecological's outlook to positive

 The document has been translated in other languages

28 Nov 2019

Hong Kong, November 28, 2019 -- Moody's Investors Service has affirmed ENN Ecological Holdings Co., Ltd's Ba2 corporate family rating (CFR), as well as the Ba2 rating on the senior unsecured notes issued by ENN Clean Energy International Investment Limited and guaranteed by ENN Ecological.

At the same time, Moody's has revised the outlook to positive from stable.

Moody's rating action follows ENN Ecological's announcement on 21 November that it will acquire a 32.80% stake in ENN Energy Holdings Limited (ENN Energy, Baa2 stable) for RMB25.8 billion from ENN Group International Investment Limited (EGII) and Essential Investment Holding Company Limited.

All of the above entities are ultimately controlled by ENN Ecological's chairman, Wang Yusuo. The proposed reorganization is subject to shareholder and regulatory approvals.

ENN Ecological will fund the acquisition through (1) transfer of its 9.97% stake in Santos Limited for RMB7.1 billion; (2) a new share issuance for RMB13.3 billion; and (3) cash of RMB5.5 billion, all to EGII and Essential Investment Holding Company Limited. The company also intends to partially fund the cash portion of the consideration through a private placement to no more than 10 investors of up to 246 million shares for an amount of no more than RMB3.5 billion.

RATINGS RATIONALE

"The change in outlook to positive reflects our expectation that the reorganization, if completed as planned, will strengthen ENN Ecological's business profile," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

The intragroup reorganization, if completed, will enlarge ENN Ecological's operating scale and business diversity, which will in turn strengthen the predictability and stability of its cash flow and profit.

ENN Ecological plans to consolidate ENN Energy's financials following the transaction, and Moody's expects EGII would continue to exert management oversight and control over ENN Energy via ENN Ecological.

Moody's estimates ENN Ecological's scale -- in terms of revenue, EBITDA and assets -- would increase by around 2.0x-2.5x, assuming the proportionate consolidation of ENN Energy's financials.

ENN Ecological's enhanced operational stability will be driven by the long-term concession and diversified revenue mix stemming from ENN Energy's established position in the piped-gas sector, with geographically diversified operations.

ENN Ecological will also benefit from integrating ENN Energy's clean energy-related business, which has been its strategic focus. Favorable industry trends for clean energy will further support the growth of its integrated operations.

ENN Energy, which is listed on the Hong Kong Stock Exchange, constructs and operates facilities for the distribution of piped natural gas to residential, and commercial and industrial (C&I) customers in China.

"The combined company's financial profile will be moderate, but will improve slightly over the next two years," adds Lu.

Specifically, Moody's estimates that ENN Ecological's adjusted debt/EBITDA -- pro-forma for the proportionate consolidation of ENN Energy's financials and a RMB5.5 billion increase in debt to fund the cash portion of the consideration -- will remain broadly unchanged at 4.2x in 2018.

Moody's expects the company's debt leverage will improve toward 3.5x-4.0x over the next two years as growth in earnings will outpace any further rises in debt. This level of leverage remains higher than Moody's had previously expected for ENN Ecological on a standalone basis, but will be strong for its Ba2 ratings considering the combined company's strengthened business profile.

If the company's downstream natural gas distributing and marketing businesses become the main drivers of revenue, profit and cash flow, Moody's may change its approach to rating ENN Ecological, including the rating methodology, to reflect the change in the associated operational and financial risks.

Moody's expects the combined company's revenue and EBITDA will increase moderately in the next two years, mainly driven by growth in natural gas consumption, which benefits the downstream and construction businesses, and new methanol and LNG production capacity.

Moody's further expects the combined company's adjusted debt will increase slightly to fund ENN Energy's new project acquisitions and ramp-up existing projects.

ENN Ecological's standalone liquidity position is modest. At the end of September 2019, its cash -- including restricted cash -- of RMB3.8 billion and expected operating cash flow of around RMB1.9 billion over the next 12 months were sufficient to cover its short-term debt of RMB4.1 billion, bills payable of RMB87 million and estimated maintenance capital spending of RMB350 million over the same period.

The company will also need to pay RMB2.8 billion and RMB2.7 billion within 15 days and 12 months, respectively, following the asset transfer.

ENN Ecological's Ba2 CFR reflects (1) the favorable industry trends for its methanol production and clean energy-related businesses; and (2) its long track record and diversified business portfolio, which underpin stability in its business profile.

On the other hand, ENN Ecological's CFR is constrained by its exposure to commodity price volatility, and China's evolving policies and regulations.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

ENN Ecological's coal and methanol operations are exposed to high environmental and safety risks, in particular soil and water pollution. However, ENN Ecological has to date not experienced any major compliance violations related to water discharge or waste disposal. The risks are also somewhat mitigated by its operating track record and continuous focus on clean energy-related businesses.

On the governance front, the company's ownership is concentrated in its key shareholder, Wang Yusuo, his wife, Zhao Baoju, and his controlling entities, with a combined 48.4% stake in the company at the end of June 2019. This stake will further increase to 75.3% following the re-organization. This risk is partially mitigated by the company's track record of good corporate governance, its listed status and the presence of three independent board directors. On the financial policy front, the company's rating also factors in its strong appetite for debt-funded expansionary investments and acquisitions.

The rating could be upgraded if ENN Ecological (1) increases its operating scale and business diversification after the re-organization, while maintaining its profit margin through organic growth; and (2) maintains its credit profile and demonstrates conservative financial and investment policies.

The rating outlook could return to stable if (1) the proposed re-organization does not go ahead as planned; (2) ENN Ecological's revenue growth slows or its profit margin narrows because of high commodity price volatility or adverse changes in the government's policies and regulations; (3) it undertakes aggressive debt-funded acquisitions or investments that weaken its credit profile; or (4) its adjusted debt/EBITDA rises above 5.0x on a combined, sustained basis as its business grows over time.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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

In June 2019, ENN Ecological completed the disposal of its biopharmaceutical business.

ENN Ecological was listed on the Shanghai Stock Exchange in 1994. The company's chairman, Wang Yusuo, his wife, Zhao Baoju, and his controlling entities owned 48.4% of the company at the end of June 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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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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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