12 JULY 2011http://www.reuters.com/
TEXT-Fitch Rates China Hongqiao 'BB'; Outlook Positive
Edited by : AL CIRCLE
4 min read
Fitch Ratings has assigned primary aluminium manufacturer China Hongqiao Group Limited (Hongqiao) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB' with Positive Outlook, and a senior unsecured rating of 'BB'. The agency has also assigned Hongqiao's proposed senior unsecured notes an expected 'BB(exp)' rating.
The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. Net proceeds from the issue will mainly be used to expand capacity at its aluminium production and captive power plant.
"The ratings reflect Hongqiao's competitive cost advantage over other major Chinese aluminium producers, particularly in alumina and electricity cost, which together accounts for roughly 75% of its aluminium production cost," said Alan Chan, Associate Director in Fitch's Asia-Pacific Corporates team. "Further, Hongqiao is expected to reach a 70% self-sufficiency rate for its electricity requirements within the next 12 to 18 months, up from 55% in 2010 and 33% in 2009, supporting the Positive Outlook."
Hongqiao's overall electricity cost for 2010 was 40% lower than the standard electricity tariff rate. This was achieved through its captive power plant and privately-owned power grid. By supplying electricity through its captive power plant which runs at a higher utilisation rate, Hongqiao's self-supplied electricity is about 50% cheaper than rates from major power generators. The balance of the company's electricity requirements is supplied exclusively by Gaoxin Aluminium and Power (Gaoxin) with a high level of stability. Gaoxin is a local state-owned energy company based in the same Zouping County as Hongqiao with an installed power generation capacity of 1,880MW and an annual alumina production capacity of four million tons. Hongqiao has started building a new power plant, which is expected to be completed by July 2012 and will bring its electricity self-sufficiency to above 70%.
Hongqiao sourced its alumina at 31% discount to the average spot alumina price in the Chinese market in 2010. This is because of its long-term alumina bulk purchase agreement with Gaoxin, and the lower logistic cost due to their geographic proximity. Gaoxin supplies alumina at competitively low cost by refining imported bauxite, which is cheaper and more energy-efficient than domestic bauxite.
Hongqiao's ratings are further supported by its strong credit metrics with expected financial leverage (adjusted net debt/operating EBITDAR) of below 1.0x over the next 12-18 months. While Hongqiao's aggressive expansion in 2011 will likely lead to negative free cash flow over the short term, Fitch believes that the cost advantage achieved by its captive power plant expansion will further support its profitability and top line growth, resulting in future positive free cash flow generation. Hongqiao's large operating scale and strong profitability (FY10: EBITDAR USD913m) also provide significant headroom to absorb any aluminium and raw material price fluctuations.
Rating constraints are Hongqiao's limited number of manufacturing bases and their concentration in Shandong Province, leaving it exposed to unexpected operational failure of any single factory and regulatory risk of the province. Currently, Hongqiao has only three production sites, which are all located in Shandong Province. Operational failure of any Hongqiao's plants would severely impact revenue given their capacity utilization is currently higher than 100%.
The Outlook may be changed to Stable if Hongqiao fails to improve its electricity self-sufficiency rate over the next 18 months to above 70%; and/or if EBITDA drops below CNY4,500 per ton on a sustained basis. Fitch may consider further negative rating action if there is deterioration in its business profile, including a weakening of its market-leading position in Shandong Province; and/or if net debt/ EBITDAR rises above 2.0x on a sustained basis. The ratings may be upgraded if Hongqiao successfully raises electricity self-sufficiency above 70% while maintaining financial leverage below 1.0x.
The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. Net proceeds from the issue will mainly be used to expand capacity at its aluminium production and captive power plant.
"The ratings reflect Hongqiao's competitive cost advantage over other major Chinese aluminium producers, particularly in alumina and electricity cost, which together accounts for roughly 75% of its aluminium production cost," said Alan Chan, Associate Director in Fitch's Asia-Pacific Corporates team. "Further, Hongqiao is expected to reach a 70% self-sufficiency rate for its electricity requirements within the next 12 to 18 months, up from 55% in 2010 and 33% in 2009, supporting the Positive Outlook."
Hongqiao's overall electricity cost for 2010 was 40% lower than the standard electricity tariff rate. This was achieved through its captive power plant and privately-owned power grid. By supplying electricity through its captive power plant which runs at a higher utilisation rate, Hongqiao's self-supplied electricity is about 50% cheaper than rates from major power generators. The balance of the company's electricity requirements is supplied exclusively by Gaoxin Aluminium and Power (Gaoxin) with a high level of stability. Gaoxin is a local state-owned energy company based in the same Zouping County as Hongqiao with an installed power generation capacity of 1,880MW and an annual alumina production capacity of four million tons. Hongqiao has started building a new power plant, which is expected to be completed by July 2012 and will bring its electricity self-sufficiency to above 70%.
Hongqiao sourced its alumina at 31% discount to the average spot alumina price in the Chinese market in 2010. This is because of its long-term alumina bulk purchase agreement with Gaoxin, and the lower logistic cost due to their geographic proximity. Gaoxin supplies alumina at competitively low cost by refining imported bauxite, which is cheaper and more energy-efficient than domestic bauxite.
Hongqiao's ratings are further supported by its strong credit metrics with expected financial leverage (adjusted net debt/operating EBITDAR) of below 1.0x over the next 12-18 months. While Hongqiao's aggressive expansion in 2011 will likely lead to negative free cash flow over the short term, Fitch believes that the cost advantage achieved by its captive power plant expansion will further support its profitability and top line growth, resulting in future positive free cash flow generation. Hongqiao's large operating scale and strong profitability (FY10: EBITDAR USD913m) also provide significant headroom to absorb any aluminium and raw material price fluctuations.
Rating constraints are Hongqiao's limited number of manufacturing bases and their concentration in Shandong Province, leaving it exposed to unexpected operational failure of any single factory and regulatory risk of the province. Currently, Hongqiao has only three production sites, which are all located in Shandong Province. Operational failure of any Hongqiao's plants would severely impact revenue given their capacity utilization is currently higher than 100%.
The Outlook may be changed to Stable if Hongqiao fails to improve its electricity self-sufficiency rate over the next 18 months to above 70%; and/or if EBITDA drops below CNY4,500 per ton on a sustained basis. Fitch may consider further negative rating action if there is deterioration in its business profile, including a weakening of its market-leading position in Shandong Province; and/or if net debt/ EBITDAR rises above 2.0x on a sustained basis. The ratings may be upgraded if Hongqiao successfully raises electricity self-sufficiency above 70% while maintaining financial leverage below 1.0x.
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