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Rating Action:

Moody's upgrades China Oriental to B2; outlook negative

08 Sep 2015

Hong Kong, September 08, 2015 -- Moody's Investors Service has upgraded China Oriental Group Company Limited's corporate family rating to B2 from B3.

At the same time Moody's confirmed the company's B3 senior unsecured debt rating.

The ratings outlook is negative.

The rating actions conclude the rating review initiated on 20 August 2015 upon China Oriental's redemption of its USD330 million notes.

RATINGS RATIONALE

"The upgrade of China Oriental's corporate family rating reflects the company's ability to keep its operations profitable in a difficult steel market in China (Aa3 stable)," says Franco Leung, a Moody's Vice President and Senior Analyst.

China Oriental reported positive EBITDA of RMB717 million and net profit before tax of RMB37 million in 1H 2015 despite a fall of 26.9% for the company's reported average selling prices for self-manufactured steel products. The company had also generated positive operating cash flow of RMB2.4 billion in 1H 2015.

This is because China Oriental improved its market position by taking more share from peers. Its steel production volume increased by 6.6% in 1H 2015 compared with a total production contraction of 1%-2% in the domestic steel industry. The company's main products—H-section steel, steel billets, rebar and steel piles—contributed to the increase.

Moreover, the company's efficient operations have shrunk its costs. For example, it reduced energy consumption, and raised its self-generated electricity to 50% of all used in 1H 2015 from 40% in 2014. This enabled the company to generate a EBITDA margin of 6.5% in 1H 2015.

"The upgrade also considers the company's ability to liquidate its bank acceptance notes to reduce its debt leverage," says Jiming Zou, a Moody's Vice President and Senior Analyst, and also the Local Market Analyst for China Oriental.

China Oriental reduced its gross debt to RMB6.7billion at end-June 2015 from RMB8.3 billion at end-2014. Accordingly, the company reduced its debt leverage to 3.9x in June 2015 on a trailing 12 month basis from 4.3x in December 2014.

Moody's expects the company's profitability will continue to be under pressure because of China's slowing growth and the country's ongoing economic rebalancing that aims to reduce China's reliance on infrastructure investments. Thus, the company's debt leverage will remain around 4.0x--4.5x in the next 12--18 months. This positions it at the B2 rating level when compared with non-property rated peers in China.

China Oriental's B2 corporate family rating also factors in its domestic market leadership in H-section steel products and the efficiency of its production process when compared to its domestic peers. With a portfolio of long-steel products, China Oriental benefits from the positive long-term demand from ongoing urbanization and infrastructure development in China.

However, the company is exposed to the cyclical nature of the steel industry and a challenging operating environment in China, characterized by declining demand and oversupply. These factors have pressured its profitability and financial metrics.

China Oriental has increased its level of priority debt, which has resulted in increased subordination risk to offshore senior unsecured bond holders. Moody's estimates that priority debt and secured trade payables at the operating companies represented around 50-60% of the company's consolidated total liabilities in June 2015.

Moody's believes that this level of priority debts will not be reduced and has notched the rating of the company's senior unsecured debt to one level below its corporate family rating.

The negative outlook reflects (1) the weak steel demand in China which will continue to pressure the company's credit metrics; (2) the high level of short term debt which will increase refinancing risk; and (3) the company's impaired access to the equity markets, until issues regarding shareholding structure and minimum listed share float are resolved.

Given the negative outlook, there is limited prospects for a rating upgrade. However, the rating outlook could return to stable, if the company (1) maintains its debt leverage at 4.0x-4.5x on a sustainable basis; (2) improves its debt maturity profile by increasing the portion of long term borrowing; and (3) resumes trading of its listed shares after its major shareholders agree on an ownership structure.

The rating could be under downgrade pressure, if (1) the company shows increased debt leverage such that its debt/EBITDA exceeds 5.0x, or (2) its liquidity profile further weakens as indicated by negative operating cash flow and/or cash (including restricted cash) coverage below 50% of the short term debt.

Any escalation in shareholders dispute could also result in downgrade pressure.

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

China Oriental Group Company Limited, with total steel output capacity of 11 million tonnes per annum, mainly manufactures H-section steel products and hot rolled strips/strip products at its steel mills in Hebei Province. The company listed on the Hong Kong Stock Exchange in 2004. It is 45%-owned by its founder, Mr. Han Jingyuan, and 47% by ArcelorMittal.

The Local Market analyst for this rating is Jiming Zou, +86 (21) 2057 4018.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Franco Leung
Vice President - Senior Analyst
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's upgrades China Oriental to B2; outlook negative
No Related Data.
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