Hong Kong, December 02, 2019 -- Moody's Investors Service has confirmed Hilong Holding Limited's B1 corporate
family rating and senior unsecured ratings.
At the same time, Moody's has changed the outlook to positive
from ratings under review.
This rating action concludes the review for upgrade initiated on 10 September
2019 following improvements in the company's business and credit
profiles.
RATINGS RATIONALE
"The positive outlook mainly reflects the company's strengthened business
profile, and our expectation that the company will continue to improve
its credit profile over the next 12-18 months, even amid
ongoing volatility in the oil & gas industry," says Chenyi Lu,
a Moody's Vice President and Senior Credit Officer.
"The positive outlook also reflects improvements in the company's liquidity
and debt maturity profile following the completion of a USD200 million
bond issuance in September 2019 to fund part of its upcoming maturities
in June 2020," adds Lu.
Moody's expects Hilong's debt leverage, as measured by adjusted
debt/EBITDA, will improve to 3.0x over the next 12-18
months from 3.6x for the 12 months ended June 2019 and 3.9x
in 2018, mainly because of continued earnings improvements.
Such a level of leverage is strong for its B1 rating and provides it with
a buffer against its working capital needs and potential industry volatility.
Moody's projects the company's revenue will grow by a further 12%
in 2019 and 9% in 2020, following strong growth in the last
two years. Such strong growth will mainly be driven by (1) continued
strong demand for its oilfield equipment manufacturing and services,
especially in China; (2) the growing business traction in its concrete-weighted
coating services and pipeline inspection services; (3) the company's
growing customer base; and (4) its expanded oil and gas-field
services offerings. The company posted strong 23.6%
year-on-year revenue growth in 1H 2019.
Moody's expects the company's adjusted EBITDA margin will improve slightly
to around 26.0%-26.5% over the next
12-18 months from 24.2% for the 12 months ended June
2019, as the company continues to focus on cost and expense controls
and increases operating efficiencies with its higher revenue.
Hilong's liquidity profile is modest. At the end of June 2019,
the company had cash and cash equivalents of RMB625 million and restricted
cash of RMB191 million. The company also issued USD200 senior notes
in September 2019. These liquidity sources and Moody's expected
operating cash flows of around RMB450-500 million over the next
12 months are insufficient to cover its RMB2.9 billion of short-term
debt, including the USD310 million notes due in June 2020,
RMB221 million of bills payable, and estimated RMB150 million of
maintenance capital expenditure over the same period.
However, this modest liquidity position is mitigated by Hilong's
track record of prudent financial management and good access to the domestic
bank and debt markets, as well as to the equity capital markets.
Moody's expects the company to seek further refinancing for its
remaining USD165 million bonds in advance of the maturity in June 2020.
Any signs of failure to complete the refinancing in a timely manner will
likely result in downward rating pressure.
Hilong's B1 corporate family rating reflects its strong global market
positions in the drill pipe and oil country tubular goods (OCTG) coating
materials and services sectors. This global strength is based on
the company's well-regarded products, technological capabilities
and close, long-term relationships with its major customers.
Hilong's rating also reflects its product, service and geographic
diversification, which ensures resilience against its industry peers
and partly offsets the challenges associated with a cyclical industry
and high customer concentration.
Hilong's rating is constrained by its relatively small size, high
customer concentration, and performance volatility caused by the
cyclical nature of the drill pipe and oilfield services businesses,
which are exposed to the unpredictability of global oil prices.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
Firstly, the company is exposed to increasingly stringent regulations
for oil and gas operations and access to new resources. However,
Hilong has to date not experienced any major compliance violations related
to air emissions, water discharge or waste disposal.
Secondly, on the governance front, the company's ownership
is concentrated in its key shareholder, Jun Zhang, who held
a total 58.7% stake in the company at the end of June 2019.
This risk is partially mitigated by the company's track record of good
corporate governance, its listed status, and disciplined dividend
policy.
The ratings could be upgraded if the company (1) achieves strong growth
in its revenue and earnings; (2) further expands its product,
service and geographic diversification while maintaining its profit margin;
(3) improves its debt leverage, such that adjusted debt/EBITDA falls
below 3.5x-4.0x on a sustained basis; and (4)
sustains positive free cash flow generation that results in an adequate
liquidity position.
The outlook could return to stable if (1) revenue growth weakens as a
result of the low and volatile oil prices as well as a decline in profit;
(2) the strain on its working capital increases, prompting it to
raise a large amount of debt; (3) its debt leverage rises,
such that adjusted debt/EBITDA exceeds 4.0x on a sustained basis;
or (4) its liquidity position weakens.
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in May 2017. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
Hilong Holding Limited is an integrated oilfield equipment and services
provider. The company's four main businesses are (1) oilfield equipment
manufacturing and services, (2) line pipe technology and services,
(3) oilfield services, and (4) offshore engineering services.
The company listed on the Hong Kong Stock Exchange in 2011. Jun
Zhang, the chairman and founder of the company, is the controlling
shareholder, with a 58.7% equity interest as of 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.
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.
Moody's considers a rated entity or its agent(s) to be participating
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the rated entity is participating and the rated entity or its agent(s)
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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.
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
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
