Sinochem Hong Kong #A-# Rating Affirmed Following Asset Spin- Outlook Stable

Stocks and Financial Services Press Releases Thursday June 28, 2018 11:49
HONG KONG--29 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 28, 2018--S&P Global Ratings today affirmed its 'A-' long-term issuer credit rating on Sinochem Hong Kong (Group) Co. Ltd. The outlook is stable. We also affirmed our 'A-' long-term issue rating on the outstanding medium-term note program and senior unsecured notes that Sinochem Hong Kong guarantees.

In addition, we affirmed our 'A-1' short-term issue rating on a US$300 million commercial paper (CP) program of Sinochem CP Co. Ltd., a fully owned subsidiary of Sinochem Hong Kong. The CP program is supported by an irrevocable direct-pay letter of credit from the New York Branch of Bank of China Ltd.

We also affirmed our 'A-1+' short-term issue rating on the US$300 million CP program of Sinochem CP Co. Ltd. that is supported by an irrevocable direct-pay letter of credit from the New York branch of Australia and New Zealand Banking Group Ltd.

Sinochem Hong Kong is Sinochem Group's key platform to conduct international trade, investments, and offshore funding.

We affirmed the rating because we expect Sinochem Hong Kong's status as a core subsidiary of Sinochem Group to remain intact despite the spin-off of its oil and gas assets. The company remains the group's only strategic offshore investment and financing platform.

Sinochem Hong Kong sold its oil and gas and chartered shipping services businesses to Sinochem Group at the end of last year, according to the group's plan. As a result, these businesses were deconsolidated from Sinochem Hong Kong's 2017 annual report.

In our view, despite the spin-off, Sinochem Hong Kong will continue to be key to the group's strategy and serve as a direct extension of the group for offshore investments and businesses. It is also fully integrated with Sinochem Group strategically, operationally and financially, as all key decisions are made by the group. Sinochem Hong Kong's majority ownership in two listed flagship group subsidiaries highlights its importance within Sinochem Group.

Sinochem Hong Kong owns 52.65% of Sinofert Holdings Ltd. and 53.97% of China Jinmao Holdings Group Ltd., which operate the group's fertilizer and property segments, respectively. These subsidiaries also represent two of the group's five key business segments. Considering the contribution of these two business segments, we expect Sinochem Hong Kong to continue to be Sinochem Group's largest profit contributor.

Following the spin-off, Sinochem Hong Kong's real estate business will become the driver of its stand-alone credit profile. Jinmao has been more aggressive in land acquisitions in the past couple of years as property prices in China have been rising. As a result, we expect the higher margin property segment to remain the main contributor to Sinochem Hong Kong's cash flows over the next couple of years.

We believe the fertilizer business will remain a key strategic segment for both Sinochem Hong Kong and the group. We expect the fertilizer market to remain oversupplied in the next 12 months with modest recovery prospects due to China's supply-side reform efforts. We anticipate that the subdued market conditions will dampen Sinochem Hong Kong's overall profitability, despite the company's efforts to increase fertilizer sales and control costs.

Sinochem Hong Kong is less diversified after the spin-off as it now focuses on two business segments, real estate and fertilizer. However, this is offset by Jinmao's strong market position and the group's support, which enhances the company's ability to raise funding and makes it less vulnerable to market uncertainties.

We continue to believe that extraordinary government support for the parent is likely to flow to Sinochem Hong Kong in case the company comes under financial distress. We therefore equalize the rating on Sinochem Hong Kong with the 'a-' group credit profile of Sinochem Group, given its status as a core subsidiary within the group.

Our assessment of Sinochem Group's very high likelihood of extraordinary support from the Chinese government in the event of financial distress is based on the following group characteristics:
  • Very strong link to the government. The Chinese government fully owns Sinochem Group, and is committed to enhance state influence in strategically important sectors such as agriculture. The government is able to exert strong influence on the group by appointing senior management.
  • Very important role to the government. Sinochem Group plays a vital role in supporting China's grain safety, productivity, and national security. The group also plays important roles for the government in operating national strategic reserves for important materials. In our view, the group provides important agriculture input products and public services that are not easily undertaken by the private sector.
Our assessment considers Sinochem Hong Kong's financials on a restated basis after the spin-off of its oil and gas assets.

The stable outlook on Sinochem Hong Kong for the next 24 months reflects our expectation that the company will remain a core subsidiary of Sinochem Group and benefit indirectly from extraordinary government support through the group. We anticipate that the group's credit metrics will improve modestly over the next two years on the robust performance of its property segment and a slight recovery in its fertilizer segment.

We could lower the rating on Sinochem Hong Kong if we assess the likelihood of timely and sufficient extraordinary government support to Sinochem Group has weakened or we no longer assess Sinochem Hong Kong as a core subsidiary of Sinochem Group.

We may also lower the rating if Sinochem Hong Kong's EBITDA interest coverage weakens materially to below 2.0x on a consistent basis.

We could raise the rating on Sinochem Hong Kong if Sinochem Group lowers its leverage on a sustainable basis either due to improved operating performance or lower capital spending. We could also upgrade Sinochem Hong Kong if we assess that the likelihood of timely and sufficient extraordinary government support to the group has significantly strengthened.

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