RPT-Fitch Affirms Yingde Gases at 'BB'; Outlook Stable
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May 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Yingde Gases Group Company Limited's (Yingde) Long-Term Issuer Default Rating (IDR) at 'BB'. The Outlook is Stable. Fitch has also affirmed the senior unsecured debt ratings of Yingde and Yinde Gasses Investment Limited at 'BB'.
The rating action is driven by Fitch's view that the steady growth in Yingde's core markets will continue to support its strong cash generation. Its revenue base will also become more diversified with new facilities being built and operated for end-users in the chemical/non-ferrous/metal industry. This steady business profile mitigates the increase in financial leverage, which is mainly driven by a faster-than-expected increase in capex work begins on new projects.
KEY RATING DRIVERS
Utility Type Business: Yingde's on-site gas supply business, which accounted for 88% of revenue in 2013 (87.9% in 2012), generates stable cash flow similar to that seen in utility companies. This business benefits from the cost pass-through and minimum off-take mechanisms in the long-term contracts between Yingde and its on-site customers. In 2013, Yingde increased its production facilities by 16 to 57, and expanded its total installed oxygen capacity by 50% to 1.6 million normal cubic metres of gas per hour (Nm3/hr). It is scheduled to further increase its oxygen capacity to 2 million Nm3/hr at end-2014.
Stable Profitability: Relative to peers in the industry, Yingde enjoys more stable profitability due to the high contribution from the on-site business.
Operating profit margin was stable at 22% for both 2013 and 2012. Gross profit has risen in tandem with growing capacity. Meanwhile, Yingde's competitors, who have higher exposure to the merchant gas sales segment, which has higher gross margin but is subject to more volatile demand and pricing, tend to have more changeable earnings profiles.
Improved Long-term Funding Sources: Yingde's improving access to various funding sources has given it greater financial flexibility to fund its projects on hand. At end-2013, only CNY1.2bn out of CNY7bn in total borrowings were classified as current, compared with CNY3.3b out of CNY6.1b in total borrowings a year earlier, showing that Yingde has significantly improved its access to long-term funding from lenders.
Negative FCF Constrains Ratings: High capex over the next two to three years will put Yingde in negative free cash flow (FCF) before 2016. Yingde is still at an expansionary stage and its cash flow will be insufficient to fully fund its capex unless capex stabilizes at CNY2bn by 2016. The high capex has caused funds from operations (FFO) net leverage to rise to 4.3x in 2013, above the 3.5x level at which Fitch may consider negative rating action. However, Fitch expects this to be temporary. Higher capex in 2012 and 2013 will result in higher cash flow generation from 2014 and enable Yingde to deleverage to below 3.5x after 2015.
Small by Global Standards: The international industrial gases sector is dominated by top international players who have strong market positions in the merchant market and the financial strength to compete in the on-site business. Although Yingde has a stronghold in the Chinese on-site segment, the scale of the company is still small by global standards.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- deterioration of Yingde's business profile demonstrated by falling cash gross profit per unit for the on-site gas supply business
- failure to secure long-term funding for future growth
- FFO adjusted net leverage being sustained above 3.5x, or higher than 4.5x in any single year
Positive: Positive rating action is not expected in the next 12-18 months due to Yingde's high capex needs and negative FCF. However, future developments that may, individually or collectively, lead to positive rating action include:
- significant increase in business scale without deterioration in financial metrics
- positive FCF on a sustained basis