Hong Kong, June 25, 2021 -- Moody's Investors Service has affirmed the Baa3 issuer rating of
China National Gold Group Co., Ltd. (CNG).
The outlook on the rating has been changed to positive from stable.
"The change in outlook to positive reflects our expectation that
CNG's prudent approach to its capital expenditure and free cash
flow generation will sustain its credit profile, which is strong
for its rating level over the next 12-18 months," says
Kaven Tsang, a Moody's Senior Vice President.
RATINGS RATIONALE
CNG's Baa3 issuer rating incorporates its Baseline Credit Assessment
(BCA) of b1 and a four-notch uplifted based on Moody's assumption
of high support from, and very high level of dependence on,
the Government of China in times of stress.
CNG's b1 BCA primarily reflects its leading market position in gold reserves
and production in China; integrated business model, including
its diversified product operations in multiple locations; and strong
access to domestic funding as a central state-owned enterprise
(SOE).
However, CNG's BCA is constrained by the company's improved,
but still-moderate, credit metrics and its exposure to gold
and copper price volatility.
CNG has been deleveraging with the adjusted debt/EBITDA improving to 4.5x
as of the end of 2020 from 8.8x as of the end of 2016. This
was mainly driven by CNG's increased copper production volume,
higher gold and copper prices, and the company's conservative
financial policy.
Despite its increasing earnings and cash flows, CNG has significantly
reduced its annual capital expenditure to RMB3.3 billion in 2020,
down by about 50% from its peak before 2015. With adjusted
operating cash flow of RMB7.1 billion, the company generated
solid free cash flow of RMB3.4 billion in 2020, which supported
debt reduction.
The company has also adopted more balanced financing to fund its investments
and spending programs in recent years, including the initial public
offerings (IPOs) of its subsidiaries, China National Gold Group
Gold Jewellery Co., Ltd and China National Gold Group Irradiation
Co., Ltd., for around RMB1.1 billion
in early 2021.
Moody's expects CNG to maintain its conservative financial policy,
which should strengthen its capital structure and sustain its financial
profile at improved levels through the commodity cycles.
Under Moody's price assumption of weaker prices for gold and copper,
CNG's EBITDA will be modestly lower, maintaining its debt/EBITDA
at around 4.5x over the next 12-18 months. This lower
EBITDA is offset partially by lower debts as CNG will use its cash holding
to reduce debt.
Such leverage metrics will be strong for its BCA of b1.
The high support assessment is underpinned by the company's critical
role in executing China's gold strategy; its leading scale,
with the largest gold reserves in China; its important role in consolidating
and upgrading China's gold industry; and the history of financial
support from the government. The support assumption also factors
in the government's strong ability to provide support, as
reflected by China's A1 sovereign rating.
In terms of environmental, social and governance (ESG) risks,
CNG as a central SOE has a good track record in environmental compliance
and managing the safety of its production. CNG has procedures in
place to comply with regulations and to monitor pollutants released into
the air, water, and soil during production. While CNG
is exposed to the social risks associated with the mining industry,
including health and safety and responsible production, the company
is committed to promoting production safety and eliminating hidden dangers.
CNG also carries out poverty-alleviation projects in areas near
its subsidiaries' operations.
With respect to corporate governance factors, the rating considers
CNG's status as a central SOE, which is subject to the government's
close supervision and monitoring. It has also demonstrated a more
prudent financial policy over the past few years by deleveraging,
driving the positive rating action. Although CNG is not a listed
company, Moody's estimates listed assets accounted for 70%
of CNG's total assets as of June 2021. This helps to provide
more transparency market regarding CNG's financial policy and investments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CNG's rating could be upgraded if it (1) maintains its leading market
position, (2) balances its cash flow generation and business growth
needs, and (3) continues to strengthen its financial profile,
such that its adjusted debt/EBITDA stays below 5.5x-6x.
A sovereign upgrade is unlikely to trigger a rating upgrade for CNG without
an improvement in the company's BCA.
CNG's rating could be downgraded if (1) its operational performance
deteriorates, causing leverage to rise significantly, or (2)
the company pursues aggressive business expansion that worsens its financial
profile, such that its adjusted debt/EBITDA remains above 7.5x-8.0x.
Moody's could also downgrade CNG's rating without lowering its BCA if
Moody's assesses that government support for the company has weakened.
The methodologies used in these ratings were Mining published in September
2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
China National Gold Group Co., Ltd. (CNG) was founded
in 2003, after the reorganization of the former China National Gold
Corporation. CNG falls under the direct supervision and administration
of the State-owned Assets Supervision and Administration Commission
(SASAC) of the State Council. The company is the only central government-owned
enterprise operating in China's gold industry.
CNG reported revenues of RMB113 billion and total assets of RMB109 billion
in 2020.
The local market analyst for this rating is Jin Wu, +86 (212)
057-4021.
REGULATORY DISCLOSURES
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Kaven Tsang
Senior Vice President
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
