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

Stocks and Financial Services Press Releases Monday January 29, 2018 18:47
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 Metallurgical Corp. of China Ltd. (MCC Ltd.) to 'BBB+' from 'BBB'. The outlook is stable.

Our upgrade on MCC Ltd. is driven by our reassessment of the credit profile of China Minmetals Corp. (Minmetals) group, the ultimate parent of MCC Ltd. We expect Minmetals to 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 China Metallurgical Group Corp. MCC Ltd. is a subsidiary of Minmetals through China Metallurgical Group Corp.

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

We believe MCC Ltd.'s operational and financial performance in the past 12 months supports its stand-alone credit profile at 'bb'. We expect MCC Ltd. to maintain its position as one of the largest E&C companies in China. The company has strong sector expertise and a long record of having constructed almost all major metallurgical refining plants in China. In our view, MCC Ltd. is one of the key beneficiaries of the recent cyclical recovery in the steel industry and upgrade demand prompted by tighter environmental regulations. The company's new contract wins for metallurgical engineering grew by 78% year-on-year in the first half of 2017, significantly outpacing growth of total new contract wins at 22%. MCC Ltd.'s order backlog amounts to Chinese renminbi (RMB) 715 billion as of June 30, 2017, which we believe provides 24-36 months of revenue visibility.

We expect MCC Ltd. 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 Ltd.'s revenue. In addition, MCC Ltd. 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 Ltd.'s credit metrics to keep improving over the next 12-24 months, although 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 Ltd. has also focused on working capital management through prudently selecting projects, emphasizing 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 Ltd.

The stable outlook on MCC Ltd. reflects our view of the stable credit profile of the Minmetals group, which is the key driver of our rating on MCC Ltd. We expect MCC Ltd. to remain a core subsidiary 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 Ltd. to continue to receive extraordinary support from the Chinese government through the Minmetals group. Meanwhile, we believe MCC Ltd. 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 may lower the rating on MCC Ltd. if our assessment of Minmetals' group credit profile weakens, as indicated by EBITDA interest coverage staying below 2x. We would also downgrade MCC Ltd. 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 likelihood to be low during the next 12-24 months.

We may raise the rating 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 already recognized as 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 Ltd. if Minmetals' financial metrics significantly improve as a result of its continual effort to deleverage, such that its debt-to-EBITDA ratio could meaningfully stay below 4x.


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