Hong Kong, July 27, 2021 -- Moody's Investors Service has affirmed the Baa1 issuer ratings of
China Metallurgical Group Corporation (CMGC) and its key subsidiary,
Metallurgical Corporation of China Ltd. (MCC).
At the same time, Moody's has revised the outlook on the ratings
to positive from stable.
In addition, Moody's has affirmed the Baa1 senior unsecured ratings
and the Baa2 subordinated rating on the bonds issued by MCC Holding (Hong
Kong) Corporation Limited and guaranteed by MCC. The rating outlook
has also been changed to positive from stable.
"The change in outlook to positive reflects the positive outlook
of its parent, China Minmetals Corporation and the improved standalone
credit profiles of CMGC and MCC, as the companies' earnings
continued to grow, backed by their strong order backlog.
Moreover, their prudent financial policy continues to support deleveraging,"
says Chenyi Lu, a Moody's Vice President and Senior Credit
Officer.
RATINGS RATIONALE
CMGC's Baa1 issuer rating reflects its standalone credit profile
and a two-notch uplift based on Moody's expectation that CMGC will
receive support from the Government of China (A1 stable) through its parent,
China Minmetals Corporation (Baa1 positive), in times of need.
Moody's support assessment reflects (1) CMGC's status as a core subsidiary
of China Minmetals, accounting for 53%, 57%
and 46% of total assets, revenue and adjusted EBITDA,
respectively, as of the end of 2020, (2) the integral and
important role that CMGC plays in the engineering and construction (E&C)
businesses of China Minmetals, which are strategically important
to the Chinese government; and (3) the government's strong ability
to provide support, as reflected in its A1 rating.
CMGC's standalone credit profile reflects the company's (1) long track
record, strong market position and large operating scale in the
Chinese E&C sector, particularly in the construction of steel
plants; (2) expansion into non-metallurgical construction,
which helps reduce its reliance on the mature metallurgical construction
sector; (3) relatively low leverage compared with rated domestic
construction peers'; and (4) good access to domestic banks
and capital market financing.
However, CMGC's standalone credit profile is constrained by (1)
its exposure to the cyclical nature of the property development and steel
industries; and (2) the execution and financial risks associated
with its large E&C and overseas mining projects.
CMGC recorded a 30% increase in revenue in the first quarter of
2021 and 32.2% growth in new orders in the first half of
2021 compared with the same period last year. The company's
order backlog-to-revenue was 2.9x as of the end of
2020, providing good visibility for its likely revenues over the
next two years. Moody's expects the company's revenue
to rise 11% in 2021.
That said, the company's EBITDA margin will decrease to around
6.0% in 2021 from 6.3% in 2020, as Moody's
expects the company's increased technical renovation orders and
high market competition in the construction sector will continue to pressure
its profit margins.
But Moody's forecasts the company will maintain its adjusted debt/EBITDA
at around 4.3x-4.5x in 2020-21, supported
by company's prudence in containing its capital expenditure at around
RMB4 billion per annum and in maintaining its adjusted debt at around
RMB120 billion. Such level of leverage supports the company's
improved standalone credit profile.
MCC's Baa1 issuer rating reflects its standalone credit strength
and a two-notch uplift reflecting Moody's expectation that the
company will receive support from its parent, CMGC, in times
of stress.
The credit profiles of MCC and CMGC are closely linked, given that
MCC is the key operating subsidiary of the group, accounting for
over 98% of CMGC's assets and revenues as of the end of 2020.
CMGC and MCC's issuer ratings also take into account the following
environmental, social and governance (ESG) considerations.
CMGC's resource development segment has elevated environmental risks.
They include pollution from mining and smelting, management of soil,
water and waste, and natural and man-made disasters such
as tailing dam failures and pit wall collapses. Nevertheless,
CMGC's mining businesses are small in scale and have a track record of
compliance with relevant regulations.
In terms of governance risks, Moody's has considered (1) CMGC's
100% indirect ownership by the State-owned Assets Supervision
and Administration Commission under the State Council of China,
which supervises the company's operations and financials; and
(2) the fact that both CMGC and MCC have exercised prudence in managing
their debt leverage by limiting investments in BOT (build-operate-transfer)/Public
Private Partnership projects.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating of CMGC if its parent, China Minmetals,
is upgraded.
CMGC's standalone credit profile could also improve if it achieves steady
revenue growth, stable profitability and debt reductions,
such that the company's adjusted debt/EBITDA falls below 3.5x-4.0x
on a sustained basis. However, an improved standalone credit
strength will not trigger an upgrade of CMGC without upgrade of its parent,
China Minmetals.
An upgrade of CMGC's rating will trigger an upgrade of MCC's rating.
CMGC's and MCC's ratings are unlikely to be downgraded given
their positive outlook. Moody's could revise their outlook
to stable if China Minmetals' rating outlook is changed to stable.
CMGC's and MCC's standalone credit profile could weaken because
of a reduced order backlog, lower profitability or an increase in
debt, such that both companies' adjusted debt/EBITDA stays
above 6.0x-6.5x on sustained basis.
However, such moderate weakening in their standalone credit profiles
would not have any immediate rating pressure given the expected support
from the Chinese government through its parent.
The principal methodology used in these ratings was Construction Industry
published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
China Metallurgical Group Corporation (CMGC) is engaged in the business
of engineering and construction, equipment manufacturing,
property development and resources development.
Headquartered in Beijing, CMGC is 100% owned by China Minmetals
Corporation, which is fully owned by the State-owned Assets
Supervision and Administration Commission under the State Council of China.
In 2020, CMGC reported total revenue of RMB401 billion and total
assets of RMB517 billion.
Metallurgical Corporation of China Ltd. (MCC) is the key subsidiary
of CMGC. MCC accounted of 99% and 98% of CMGC's
adjusted EBITDA and assets in 2020. MCC is one of the largest E&C
companies in China, and the market leader in the construction of
domestic steel plants. As of July 2021, MCC was 49.18%
owned by CMGC.
The local market analyst for these ratings is Jin Wu, +86 (212)
057-4021.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
Gary Lau
MD - Corporate Finance
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
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