China Hongqiao #B# Rating Affirmed On Publication Of Financial Outlook Off CreditWatch

Stocks and Financial Services Press Releases Wednesday November 22, 2017 16:35
HONG KONG--22 Nov--S&P Global Ratings

HONG KONG (S&P Global Ratings) Nov. 22, 2017--S&P Global Ratings affirmed its 'B' long-term corporate credit rating on China Hongqiao Group Ltd. (Hongqiao). The outlook is stable. We also affirmed our 'B-' long-term issue rating on the company's outstanding senior unsecured notes. We removed all the ratings from CreditWatch, where they were placed with negative implications on March 24, 2017.

We affirmed the ratings and removed them from CreditWatch after Hongqiao published its 2016 annual report and financial statements with an unqualified auditor's opinion. At the same time, the company also published a report refuting the allegations of accounting irregularities from a short-seller research firm.

We expect Hongqiao's financial position to improve due to favorable aluminum prices and the company's lower capital spending. We also anticipate that Hongqiao will have the financial resources to refinance its short-term maturities, thanks to an increase in funding from a number of Chinese banks.

In our view, the support from Chinese banks would help to restore investor confidence in Hongqiao and reduce the potential negative impact of any further campaign by short-seller firms.

On Oct. 25, 2017, Hongqiao published a clarification report related to short-seller Emerson Analytics Co. Ltd.'s allegations as well as the audit findings of Ernst & Young. The clarification report is based on BT Risk Assurance's report on the agreed-upon procedures. The BT Risk Assurance report concludes that there is no misstatement of Hongqiao's cost, profit, and cash data, and there is no undisclosed connected-party transactions. On Oct. 27, Hongqiao published its 2016 financial statements with unqualified auditor's opinion. Hongqiao's shares resumed trading on Oct. 30.

We expect the Chinese aluminum market to see a more favorable supply and demand equation in the next one to two years, with the government strictly enforcing capacity reduction for the industry. As such, we forecast Hongqiao's operating cash flow to improve, benefiting from favorable aluminum prices. Hongqiao closed 2.68 million tons of primary aluminum capacity in the third quarter this year. However, it remains the world's largest aluminum producer, with capacity of 6.6 million tons. With its domestic aluminum capacity expansion coming to an end, we anticipate that Hongqiao will gradually cut capital spending and reduce leverage. We also expect the company to continue to maintain its cost advantage over its peers.

We believe Hongqiao will maintain strong relationship with domestic banks, which will provide funding for its refinancing needs. The company's total credit facilities increased to around Chinese renminbi (RMB) 49.6 billion as of June 30, 2017, from RMB19.0 billion at the end of 2016. Specifically, CITIC Bank granted the company RMB20.0 billion credit facilities in end-June, 2017.

The stable outlook on Hongqiao reflects our view that the Chinese aluminum industry will see a more favorable supply and demand equation in the next one to two years, supported by supply-side reforms. 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 higher operating cash flow and lower capital expenditure. We also expect Hongqiao to have financial resources to meet its refinancing needs.

We could lower the ratings on Hongqiao if the company's liquidity deteriorates substantially such that there is a material liquidity deficit. We could also downgrade the company if its financial metrics significantly fall below our expectation, likely due to lower aluminum prices than our forecast, a cost overrun, or higher-than-expected debt to fund expansion. An indication of such deterioration will be the ratio of FFO to debt falling below 20% for a sustained period.

We could upgrade Hongqiao in the next 12 months if: