Zoomlion Heavy Industry Outlook Revised To Stable On Improving Operating Cash Flow And #B# Rating Affirmed

Stocks and Financial Services Press Releases Thursday April 20, 2017 17:52
HONG KONG--20 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 20, 2017--S&P Global Ratings said today   that it had revised its outlook on Zoomlion Heavy Industry Science and   Technology Co. Ltd. to stable from negative. At the same time, we affirmed our   'B' long-term corporate credit rating on the China-based machinery   manufacturer and our 'B' long-term issue rating on the senior unsecured notes   that Zoomlion H.K. SPV Co. Ltd. issued. Zoomlion guarantees the notes. In line   with the outlook revision, we revised our long-term Greater China regional   scale rating on Zoomlion and the notes to 'cnBB-' from 'cnB+'.

"We revised the rating outlook on Zoomlion to stable from negative because we   anticipate that the company's cash flow and leverage will improve over the   next 12 months," said S&P Global Ratings credit analyst Stanley Chan.

We anticipate a recovery in demand in the construction machinery sector in   China because of a higher commencement rate of infrastructure projects. Also, the machinery replacement cycle is likely to kick off. We believe demand will continue to recover in the coming 12 months, but with some uncertainties over demand from the property sector.

We expect Zoomlion's debt leverage to decrease but still remain high over the next 12 months. The gross debt balance is likely to decline modestly in the period. The company has ceased to provide off-balance-sheet guarantees to its customers since 2013. Its outstanding guarantee balance has been shrinking and is likely to be minimal by 2019.

The credit risk on Zoomlion's account receivables is likely to gradually reduce. That's because a pick-up in machinery operating hours over the past few quarters should boost earnings and cash flows of downstream customers and leasing companies. Moreover, Zoomlion is increasingly selective with client engagements based on credit risks. We forecast that the company will generate Chinese renminbi (RMB) 800 million-RMB1.3 billion in positive operating cash flow in 2017, versus negative operating cash flows in 2015 and 2016, of RMB1.8 billion and RMB5.3 billion, respectively.

We estimate that Zoomlion's revenue from its construction machinery business will reach around RMB10 billion in 2017, up 20%-30% from 2016. We also anticipate more rational behavior from customers and machinery makers in China with renewed focus on cash flows instead of on gaining market share.

We expect Zoomlion's EBITDA margin to reach 8%–9% over the next 12 months, from 0%-1% in 2016, mainly driven by lower overhead costs owing to restructuring of operations.

"The stable outlook reflects our expectation that Zoomlion's debt and interest-serving capacity will improve in the coming 12 months on the back of a demand recovery in the construction machinery business," said Mr. Chan. "In our base case scenario, we anticipate that the company will reduce its on- and off-balance-sheet debt-like obligations owing to its positive operating cash flows. However, the deleveraging will be gradual."

We may downgrade Zoomlion if the company's ratio of operating cash flows to debt is lower than 5% for a sustained period. This could happen if Zoomlion's working capital management or profitability is worse than we expect.

We may also lower the ratings if Zoomlion's funding and liquidity pressure escalates and its debt maturity profile deteriorates. This could happen if the company's banking relationships weaken, reflected in higher borrowing costs and a lower share of bank facilities from major lenders.

The potential for an upgrade of Zoomlion is limited for the next 12 months. Nevertheless, we may raise the rating if the company's debt-to-EBITDA ratio improves to less than 5.0x for a sustained period. This could happen if Zoomlion generates positive operating cash flows for early debt prepayment and continues to reduce its on- and off-balance-sheet debt.


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