China Hongqiao Upgraded To #B+# On Improving Outlook Stable

Stocks and Financial Services Press Releases Thursday April 12, 2018 18:19
HONG KONG--12 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 12, 2018--S&P Global Ratings today said it has raised its long-term issuer credit rating on China Hongqiao Group Ltd. to 'B+' from 'B'. The outlook is stable. We also raised our long-term issue rating on the company's outstanding senior unsecured notes to 'B' from 'B-'. China-based Hongqiao is the largest primary aluminum producer globally.

We raised the ratings on Hongqiao to reflect the company's improving liquidity. The company's 2017 operating cash flow exceeded our expectations mainly due to better working capital management. We expect Hongqiao to have sufficient financial sources to cover its liquidity requirements in the next 12 months, benefiting from an enriched cash balance as of end 2017, stable funds from operations (FFO), and declining capital spending. We also expect the company's financial metrics to improve with the company using excess cash to pay down debt.

Hongqiao has improved its capital structure and maturity profile through share placements and issuance of convertible bonds, respectively.

Meanwhile, we believe Hongqiao will continue to have strong access to credit from banks. Its total credit facilities increased to Chinese renminbi (RMB) 41.3 billion as of Dec. 31, 2017, from around RMB20.0 billion at the end of 2016. The company's recent capital market transactions not only boosted its cash balance, but also demonstrated its satisfactory standing in the capital market. These transactions include its share placement to CTI Capital Management Ltd. in December 2017 and to a group of institutional investors in January 2018, as well as the issuance of commercial paper and medium term notes by its mainland subsidiary.

We expect aluminum prices in 2018 to remain largely stable compared with 2017, supported by a more balanced supply and demand equilibrium on the back of China's de-capacity and environmental protection campaigns. However, aluminum producers' margins may come under pressure, given increases in the costs of raw materials and potential increases in power tariffs. Nevertheless, we expect the company to maintain its cost position enabling the company to maintain above average profitability versus its peers.

We continue to assess the company's financial policy as negative given its appetite for aggressive capacity expansion in the past. That said, the company appears to have reduced its appetite for both organic growth and acquisitions. Hongqiao's lowered its capital expenditure (capex) materially to RMB8.9 billion in 2017 from RMB21.6 billion in 2016, the first meaningful reduction in the past five years. We expect the company to further cut its capex in 2018 and 2019 as there will be no major capacity additions. As a result, we forecast Hongqiao to continue to generate positive free cash flow in the next two years.

We also kept our assessment of the company's management and governance as weak because the company only published its 2016 annual report and clarification report about five months ago. A key credit issue for the company will be whether it can develop a track record of timely and transparent financial reporting and market communication.

The stable outlook on Hongqiao reflects our view that aluminum prices will remain stable in the next 12 months, supported by a benign demand outlook and disciplined supply induced by de-capacity and environmental protection measures. We expect Hongqiao to maintain its large operational scale and cost advantage in the aluminum industry. We forecast the company to improve its leverage owing to healthy operating cash flow and lower capex.

We could lower the ratings on Hongqiao if its liquidity deteriorates due to worsening working capital management or higher-than-expected capital spending. We could also downgrade the company if its financial metrics significantly fall below our expectations, which may result from lower-than-expected aluminum prices or overruns in production costs. An indication could be its FFO-to-debt ratio falling below 20% for a sustained period.

We may upgrade the company in the next 12 months if: