Reuters logo
Fitch Affirms China Lesso at 'BB+'; Outlook Stable
August 23, 2017 / 7:07 AM / a month ago

Fitch Affirms China Lesso at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 23 (Fitch) Fitch Ratings has affirmed plastic pipes and fittings manufacturer China Lesso Group Holdings Limited's (Lesso) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook is Stable. The Stable Outlook reflects Fitch's expectation that the profitability of Lesso's core plastic pipes business will remain stable and the company will be able to maintain a low FFO-adjusted net leverage of around 0.6x-1.0x between 2017 and 2020. KEY RATING DRIVERS Stable Profitability: Fitch expects full-year 2017 gross margin to be around 27%, which is similar to that in 2016. Lesso's total revenue increased by 22.6% yoy to CNY9.0 billion in 1H17, driven by a 13.2% yoy growth in sales volume and 7.5% yoy growth in average selling prices (ASP). Gross profit margin contracted to 27.4% in 1H17 from 29.8% in 1H16, mostly due to higher raw material prices. Capex Drives Leverage: Lesso's 2016 capex and equity investments surged to around CNY3.6 billion in 2016, well beyond our expectation of CNY1.5 billion and compared with CNY1.2 billion in 2015. The capex was mainly used to expand Lesso's production bases and its Lesso Mall e-commerce platform. Lesso recorded around CNY1.5 billion in capex and CNY700 million in equity investments in 1H17, and Fitch expects capex for the full year to remain high at around CNY2.8 billion, before decreasing to CNY1.5 billion in 2018. The sharp rise in capex sent Lesso's net debt higher to around CNY2.9 billion by end-1H17 from CNY1.6 billion at end-2016. However, Fitch expects Lesso's FFO adjusted net leverage to remain low at 1.1x in 2017 and 0.9x in 2018 as we expect the company's ability to generate cash flows to remain strong. Market Position Remains Dominant: Lesso has maintained its leading position in China's plastic pipes market with 15%-18% share by volume and around 45%-50% share in its home market of southern China at end-2016. Fitch expects Lesso to continue to dominate the market in southern China while increasing its presence in other regions, the company recently completed a production facility in Hunan and is expected to commence production in 2H17. Infrastructure to Support Demand: Government infrastructure construction accounts for about 70% of Lesso's total revenue and Fitch expects Lesso's sales volume to be supported by increased fixed-asset investment in urban underground pipelines, construction of "sponge cities" that channel rainwater to prevent floods and for use, and water treatment facilities. These will be partly offset by slower FAI growth in the property sector. Geographic Concentration a Constraint: Around 60% of Lesso's revenue in 2016 came from southern China, one of the most developed markets in the country. However, this geographic concentration presents a business risk and is a constraint on Lesso's IDR. DERIVATION SUMMARY Compared with Tata Chemicals Limited (TCL, BB+/Stable), which is similar in EBITDA size, Lesso has higher and more stable margins, more consistent FCF generation, higher coverage ratios and lower FFO net leverage. However TCL has greater geographic diversification than Lesso, with around 60% of its revenue derived from the growing markets of India and about 35% from developed markets in the US and Europe. As a result, they are rated at the same level. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Plastics pipes sales volume to increase by 11% in 2017 and 8% in 2018 - Gross margin to remain at around 26% between 2017 and 2019 - Capex of CNY2.8 billion in 2017 and CNY1.5 billion each year in 2018 and 2019 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Significant increase in market share in the domestic plastic pipes and fittings sector and establishment of a strong presence outside southern China Developments That May, Individually or Collectively, Lead to Negative Rating Action - EBITDA margin sustained below 15% (2016: 17.9%) - FFO adjusted net leverage sustained above 1.0x - Sustained negative free cash flow LIQUIDITY Adequate Liquidity: Lesso has around CNY4.2 billion of short-term debt as of end-2016, which was well covered by CNY3.1 billion of cash on hand and over CNY10 billion of unused credit facilities. Contact: Primary Analyst Laura Zhai Director +852 2263 9974 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 . Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below