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Rating Action:

Moody's upgrades China Metallurgical Group and Metallurgical Corporation of China to Baa1; outlook stable

 The document has been translated in other languages

25 Sep 2017

On September 27, 2017, the press release was corrected as follows: In the tenth paragraph of the RATINGS RATIONALE section, the outlook of China Minmetals Corporation was changed to stable from negative to reflect the rating action on China Minmetals Corporation on September 25, 2017. Revised release follows:

Hong Kong, September 25, 2017 -- Moody's Investors Service has upgraded the issuer ratings of China Metallurgical Group Corporation (CMGC) and its key subsidiary, Metallurgical Corporation of China Ltd. (MCC) to Baa1 from Baa2. Moody's has also raised CMGC's baseline credit assessment (BCA) to ba1 from ba2.

At the same time, Moody's has upgraded the backed senior unsecured rating on the bonds issued by MCC Holding (Hong Kong) Corporation Limited and guaranteed by MCC to Baa1 from Baa2.

The ratings outlook is stable.

RATINGS RATIONALE

"The upgrades reflect our expectations that CMGC's financial leverage will continue to improve on a sustained basis over the next 12-18 months, supported by a robust order backlog, cost control measures and deleveraging efforts," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

"These factors will translate into steady revenue growth, improved earnings and reduced debt levels," adds Lu.

Moody's expects that CMGC's revenue will increase by more than 6% over the next 12-18 months, on the back of its robust order backlog at end-June 2017.

The company's adjusted EBITDA margin will also improve to 9.2%-9.3% over the same period from 8.8% in 2016, underpinned by its continued focus on its profitable construction businesses and real-estate development, and on expense and cost control measures.

In addition, Moody's expects that CMGC's adjusted debt will fall gradually over the next 1-2 years from RMB139 billion at end-June 2017, driven by: (1) higher earnings, better working capital management and lower capital expenditure, which together should result in positive free cash flow for debt repayment; (2) management's plan to utilize part of the high cash balance on hand to repay debt; and (3) its moderate investment needs.

CMGC's financial leverage — as measured by adjusted debt/EBITDA — will fall to about 4.5x-5.0x over the next 12-18 months from 6.3x in 2016; a situation which supports the raising of its BCA.

Moody's projects a similar improving credit trend for CMGC's core subsidiary, MCC, due to the fact that the credit profiles of CMGC and MCC are closely linked. MCC accounts for more than 90% of the parent group's revenue, adjusted EBITDA, assets and 90% of CMGC's adjusted debt. As a result, MCC's rating and outlook mirror those of CMGC.

CMGC's Baa1 issuer rating incorporates its BCA of ba1 and a three-notch uplift based on Moody's assessment of a high level of support for the company from its owner — the Chinese government (A1 stable) — in times of need.

This high support assessment is underpinned by CMGC's key role in the renovation and upgrade of steel plants in the domestic steel industry, its importance to the development of the construction industry in China, its 100% government ownership, and the track record of government support for the company. It also factors in the Chinese government's strong ability to provide support, as reflected by the sovereign's A1 rating.

Moody's notes that CMGC will become a core subsidiary of China Minmetals Corporation (Baa1 stable) — after CMGC completes its business registration to change its shareholder from the State Council of China to China Minmetals — because of the proposed merger of these two central state-owned-enterprises in December 2015.

Nevertheless, Moody's expects that central government support for CMGC will continue be provided directly to CMGC or flow through from its future parent, China Minmetals, based on CMGC's highly strategic importance to China Minmetals and the Chinese government. CMGC accounted for 52%, 56% and 51% of China Minmetals' revenue, adjusted EBITDA, and assets, respectively, in 2016.

CMGC's BCA — which is mainly supported by MCC's standalone credit profile — reflects its:

(1) Track record, strong market position and large operating scale in the Chinese engineering and construction (E&C) sector, particularly in the construction of steel plants;

(2) Expansion into non-metallurgical construction, including the building, transportation and infrastructure construction sectors, which helps reduce the impact of the mature metallurgical construction sector; and

(3) Good access to the domestic banks and capital market financing.

On the other hand, CMGC's BCA is constrained by: (1) its exposure to the pressured steel sector; and (2) the execution and financial risks associated with its large E&C and overseas mining projects.

The stable outlook on CMGC's rating incorporates Moody's expectations over the next 12-18 months that: (1) CMGC's credit metrics will be maintained at levels that are appropriate for its BCA; and (2) its important role in the country's metallurgical and construction sectors and the Chinese government's ability to support the company will remain intact, with the latter reflected by the stable outlook on the sovereign's rating.

CMGC's issuer rating is unlikely to be upgraded in the near term, given its stable rating outlook, which already factors in the likely strengthening of CMGC's financial profile.

The rating could be upgraded over time if CMGC's BCA improves significantly, underpinned by steady revenue growth, stable profitability and debt reductions, such that adjusted debt/EBITDA falls below 3.5x--4.0x on a sustained basis.

A sovereign upgrade will unlikely trigger a rating upgrade for CMGC, if the company's BCA does not improve, because Moody's government support assessment for CMGC is at the high end among Moody's-rated central state-owned-enterprises in the Chinese construction industry.

An upgrade of CMGC's rating will trigger an upgrade of MCC's rating.

CMGC's rating will be downgraded if Moody's lowers the company's BCA — because of a material deterioration in its business or financial profile — absent any material changes in the support assessment.

Credit metrics indicative of downward pressure on CMGC's BCA include a weakening in its order backlog, lower profitability and/or an increase in debt, such that adjusted debt/EBITDA fails to trend below 5.0x-5.5x over the next two years.

A downgrade of CMGC's rating, without a change in its BCA, could also be triggered by a weakening of Moody's government support assessment for the company, either directly or via its future parent, China Minmetals, due to its weakened strategic importance.

A downgrade of CMGC will trigger a downgrade of MCC's rating.

The principal methodologies used in rating China Metallurgical Group Corporation were Construction Industry published in March 2017, and Government-Related Issuers published in August 2017. The principal methodology used in rating Metallurgical Corporation of China Ltd. and MCC Holding (Hong Kong) Corporation Limited was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 a central state-owned enterprise wholly owned by the State Council of China, and supervised by the State-owned Assets Supervision and Administration Commission.

Metallurgical Corporation of China Ltd. — which is about 59.18% owned by CMGC — is a core subsidiary of CMGC and accounted for 98%, 99%, 97% and 90% of CMGC's revenue, adjusted EBITDA, assets and reported debt, respectively, in 2016.

REGULATORY DISCLOSURES

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

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

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

No Related Data.
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