December 18, 2017 / 5:10 AM / a year ago

Fitch Upgrades China Metallurgical Group to 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, December 18 (Fitch) Fitch Ratings has upgraded China Metallurgical Group Corporation's (CMGC) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating to 'BBB+', from 'BBB'. The Outlook on the IDR is Stable. At the same time, Fitch has upgraded CMGC's 59.18% owned subsidiary's - Metallurgical Corporation of China Limited (MCC) - Long-Term IDR and senior unsecured rating to 'BBB+' from 'BBB'. The Outlook on MCC's IDR is Stable. The upgrade is due to CMGC's enhanced strategic linkages with 100% parent, China Minmetals Corporation Limited (BBB+/Stable). Fitch has equalised CMGC's ratings with those of its parent using a top-down approach as per the agency's Parent and Subsidiary Rating Linkage criteria. The linkage reflects CMGC's strong operational and strategic ties with Minmetals. MCC's ratings are equalised with those of CMGC due to the companies' strong legal, operational and strategic linkages. KEY RATING DRIVERS Enhanced Linkages with Minmetals: The 2015 merger of CMGC and Minmetals created an internationally competitive, vertically integrated natural resources company, which is tasked with acquiring large overseas mining projects and securing offshore mineral assets that China lacks domestically. CMGC has effectively become the in-house construction arm of the merged enterprise, especially in regards to overseas metallurgical projects, and is critical to bolstering China's natural resource security. In addition, CMGC can help Minmetals build a warehousing and logistics network in China to support its global resource allocation capability. Expansion of Non-Metallurgical Business: CMGC has leveraged its technical expertise in engineering and construction to diversify into transportation and municipal infrastructure, property construction, environmental engineering, alternative energy, integrated piping and smart cities. Non-metallurgical engineering contracts accounted for 85% of total contracts on hand at end-1H17. CMGC has an established market presence in transportation, municipal infrastructure and property development and is as leading player in integrated pipeline systems and theme-park construction. Steel Industry Pick-Up: CMGC's new construction contracts reached CNY298 billion in 1H17, to be up by 22% yoy, driven by metallurgical engineering and non-metallurgical contracts, including housing construction and public-private partnership (PPP) projects. The increase in metallurgical engineering contracts was driven by demand for capacity replacement, relocation projects for urban steel plants, energy savings and lower emissions as well as industrial upgrades. We believe the industry is in the early stages of an equipment upgrade cycle to meet more stringent environment standards. PPP Wins: MCC had 66 PPP projects under construction, with recognised revenue of CNY9.4 billion, at end-2016 and was awarded 56 PPP infrastructure projects, valued at CNY110 billion, in 1H17. The debt raised for the PPP projects is ringfenced from or non-recourse to CMGC, which acts as a minority-interest investor. We believe the PPP projects are positive for CMGC's credit profile in the long-term, as they boost revenue without the company having to increase leverage. However, CMGC is subject to execution and cost-overrun risk, as the infrastructure projects are long-term and operate with fixed-pricing schemes. DERIVATION SUMMARY CMGC's rating reflects Fitch's assessment of the credit profile of CMGC's 100% parent and the two entities' strong linkages. CMGC plays a vital part in the vertical integration of Minmetals, whose 'BBB+' rating is three notches below China's 'A+' rating. This rating is the same as that of Aluminum Corporation of China Limited (BBB+/Stable), which serves a similar function for the Chinese government. KEY ASSUMPTIONS Fitch's Key Assumptions within Our Rating Case for the Issuer include: - Low-to-mid single-digit revenue growth - EBITDA margin around 8% in 2017-2020 - Capex of CNY4.0 billion-6.0 billion in 2017-2020 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Positive rating action on Minmetals - Strengthening linkage between CMGC and Minmetals Developments that May, Individually or Collectively, Lead to Negative Rating Action - Negative rating action on Minmetals - Weakening linkage between CMGC and Minmetals - Weakening linkage between MCC and CMGC LIQUIDITY Low Liquidity Risk: CMGC's liquidity risk is low and manageable, as reflected by CNY40 billion of cash and CNY334 billion of unutilised bank facilities, versus its CNY121 billion of gross debt at end-2016. In addition, its liquidity position is supported by strong capital-market access via commercial paper, perpetual bonds and equity placements. Contact: Primary Analyst Joseph Fong Associate Director +852 2263 9922 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here 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. 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