China Metallurgical Group Corp. Upgraded To #BBB+# On Stronger Potential Support From Minmetals Outlook Stable

Stocks and Financial Services Press Releases Monday January 29, 2018 18:49
HONG KONG--29 Jan--S&P Global Ratings
HONG KONG (S&P Global Ratings) Jan. 29, 2018--S&P Global Ratings today raised the long-term corporate credit rating on China Metallurgical Group Corp. (MCC) to 'BBB+' from 'BBB'. The outlook is stable.

Our upgrade on MCC is driven by our reassessment of the credit profile of China Minmetals Corp. (Minmetals), which directly owns 100% of MCC. Our 'BBB+' long-term corporate credit rating on Minmetals reflects our expectation that the company will maintain its competitive position in the metallurgical engineering and construction (E&C) and the metals and mining sectors with enhanced resilience and synergy following the merger with MCC.

We believe Minmetals' business risk profile has strengthened especially in metals and mining upstream, particularly owing to the smooth ramp-up of the Las Bambas mine and commencement of the Dugald River mine. In addition, the merged entity can tap both entities' expertise and strengths in mine design and exploration, and their supply of raw material. Minmetals' diversified businesses provide it with greater resilience against market dynamics, in our opinion.

We continue to believe MCC is vital in achieving the group's target to become a global powerhouse in the metals and mining industry. MCC will likely remain an important profit and cash flow contributor to the Minmetals group; MCC contributed 40%-50% to the group's EBITDA in 2016 and 2017. These factors underpin our view of MCC remaining as a core subsidiary of Minmetals, to which we equalize our rating on MCC.

Our 'bb' stand-alone credit profile on MCC reflects our expectation that the company will maintain its position as one of the largest E&C companies in China. MCC has strong sector expertise and a vast record of having constructed almost all major metallurgical refining plants in China. In our view, MCC is one of the key beneficiaries of the recent cyclical recovery in the steel industry and upgrade demand prompted by tighter environmental regulations.

We expect MCC to continue to venture into non-metallurgical fields, leveraging on its technical knowhow and established market position in the E&C sector. In the first half of 2017, the business of transportation infrastructure construction contributed around 20% to MCC's revenue. In addition, MCC has in recent years developed new capacities in the specialized E&C segments, and is now one of the leaders in the underground piping tunnel E&C market and theme park construction.

We expect MCC's credit metrics to keep improving over the next 12-24 months, although the leverage is still somewhat high. The company has targeted deleveraging in recent years, and it has been generating positive operating cash flow since 2013. MCC has also focused on working capital management through prudently selecting projects, emphasizing on cash collection, and leveraging its ability to delay supplier payment to match receivables. In its public-private partnership (PPP) investment projects, the company is rather selective, given its healthy risk appetite and prudent risk management framework. By our estimate, 25%-30% of new contracts in 2017 took the form of PPP for MCC.

The stable outlook on MCC reflects our view of the credit profile of its parent, Minmetals, which is the key driver of our rating on MCC. We expect MCC will remain a core subsidiary of the Minmetals group over the next 12-24 months, given its significant revenue and profit contribution and its importance to the group's as well as the government's strategy of promoting further integration along the resources value chain. We also expect MCC will continue to receive extraordinary support from the Chinese government through the Minmetals group. Meanwhile, we expect MCC will maintain steady revenue growth and profitability over the next 12-24 months, and use its free operating cash flow to repay debt, leading to a steady improvement in its credit metrics.

We could lower the rating on MCC if our assessment of Minmetals' group credit profile weakens, indicated by the EBITDA interest coverage staying below 2x. We would also downgrade MCC if we believe the company is no longer a core subsidiary of the Minmetals group. This could be potentially due to a major shift in Minmetals' corporate focus away from E&C, as indicated by a sustained decline in E&C revenue. We expect such a likelihood to be low during the next 12-24 months.

We may raise the rating on MCC if our assessment on Minmetals' group credit profile strengthens. This could happen if we see more indications that Minmetals' role to the Chinese government has strengthened further. Minmetals is a state-owned assets investment company and will likely become more involved in consolidating minerals and resources companies in China to ensure a secure supply of strategic metals and minerals. We may also upgrade MCC if Minmetals' financial metrics significantly improve as a result of its continual effort to deleverage, such that its ratio of debt to EBITDA could meaningfully stay below 4x.


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