Fitch Affirms China Oriental at 'BB', Withdraws Ratings

China Oriental

07/11/2018 08:27

(The following statement was released by the rating agency)


Fitch Ratings-Shanghai,Hong Kong-November 07: Fitch Ratings has affirmed China 
steel producer China Oriental Group Company Limited's (COG) Long-Term 
Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 
'BB'. The Outlook is Stable. At the same time, Fitch has chosen to withdraw the 
rating of COG for commercial reasons.

KEY RATING DRIVERS 

The ratings reflect COG's solid financial profile, driven by strong free cash 
flow generation from its core steelmaking business, which we expect to continue 
with support from a favourable domestic operating environment and COG's prudent 
financial policies. The ratings are constrained by COG's concentration in 
China's Hebei province, which is a focal point for policymakers in terms of 
capacity shutdown and production curtailment. We believe this increases the 
likelihood of policy-driven disruption to COG's steelmaking business and higher 
spending on environmental-related equipment and upgrades.

DERIVATION SUMMARY 

COG has a smaller size and slightly lower profitability than Indian steelmakers, 
JSW Steel Limited (JSWS, BB/Stable) and Tata Steel Limited (TSL, BB/Rating Watch 
Evolving, standalone: BB-), as the Indian steelmakers have lower input and 
production costs as well as iron ore self-sufficiency. COG's financial are 
stronger than those of JSWS and TSL, as reflected in its strong net cash 
position, whereas JSWS and TSL have net leverage of around 4.0x-5.0x. COG's 
financial metrics are overall much better than those of 'BB' and 'B' rated 
peers, and comparable with some investment-grade steel producers

KEY ASSUMPTIONS 

Fitch's Key Assumptions within Our Rating Case for the Issuer

- Capex of CNY2 billion per year between 2018 and 2020.

- Dividend pay-out of 40% per year between 2018 and 2020.

- Fitch iron ore price forecast of USD60 per tonne in 2018 and USD55 per tonne 
in 2019 and 2020.

- Fitch hard coking coal price forecast of AUD185 per tonne in 2018 and AUD140 
per tonne in 2019 and 2020.

RATING SENSITIVITIES 

LIQUIDITY AND DEBT STRUCTURE 

Adequate Liquidity: COG has around CNY5.6 billion in cash and cash equivalents 
and around CNY1.7 billion in total debt at end-1H18. It also has CNY5.0 billion 
in unutilised banking facilities.

RATING WITHDRAWALS 

The ratings were withdrawn with the following reason

For Commercial Purposes

China Oriental Group Company Limited; Long Term Issuer Default Rating; Affirmed; 
BB; RO:Sta

; Long Term Issuer Default Rating; Withdrawn; WD

----senior unsecured; Long Term Rating; Withdrawn; WD

Contacts: 

Primary Rating Analyst

Alan Jiang, 

Associate Director

+852 2263 9989

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong null

Secondary Rating Analyst

Charles Li, 

Associate Director

+86 21 6898 7990

Committee Chairperson

Laura Zhai, 

Senior Director

+852 2263 9974

 

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Corporate Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10050880

Solicitation Status 

https://www.fitchratings.com/site/pr/10050880#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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