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
