(The following statement was released by the rating agency)
Oct 05 - Fitch Ratings has downgraded Hong Kong-based Winsway Coking Coal Holdings Ltd's
(Winsway) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-'
from 'BB', due to its worse-than-expected business performance arising from the volatile coking
coal environment. The Outlook is Negative.
Fitch is of the view that Winsway's operation is not robust enough to defend its
margins in the current severe down-cycle in Chinese coking coal demand. The
company reported an operating loss for H112, its first since its IPO in 2010.
The agency expects profitability will not recover to 2011 levels as sales volume
decline and lower coking coal prices also affect its profit margins. The supply
agreements Winsway has with steel mill customers continue to be renegotiated
during the downcycle due to the company's weaker bargaining power.
The Negative Outlook reflects the uncertainty prevailing over coking coal demand
and the risk that prolonged volatility of coking coal prices may further damage
Winsway's business model. This may eventually affect the company's liquidity
position, which is a concern given that in 2014, the company needs to start
repaying the loan it took to acquire Grand Cache Coal. The Outlook may be
revised back to Stable on evidence of sustainable stability of volumes and
Fitch has not downgraded Winsway to the 'B' rating category due to its adequate
liquidity. The company has adopted a strategy of reducing inventory to improve
its cash balance amid the difficult market conditions. This has been sufficient
to offset the weak cash generation due to poor profitability in 2012, and to
help partly fund its Grand Cache Coal acquisition.
Furthermore, Winsway's longer term prospects remain supported by increasing
demand for Mongolian coal by Chinese steel mills. Mongolian coking coal
producers are among the lowest cost producers globally. Furthermore, proximity
to Chinese steel mills and the high quality of Mongolia coking coal also support
this trend. Mongolia has replaced Australia as the largest exporter of coking
coal to China in 2011 and 2012.
The announcement that Aluminum Corporation of China Limited (Chalco,
'BBB+'/Stable) has terminated its plan to acquire a 29.9% stake in Winsway may
see both companies eventually competing in the logistics of importing coking
coal from Mongolia. However, Fitch expects that some cooperation will persist
between the two companies given the synergies between the two.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
-gross profit falling below HKD150/ton on a sustained basis
-sustained negative free cash flow
Positive: As the current Rating Outlook is Negative Fitch's sensitivities do not
currently anticipate developments with a material likelihood, individually or
collectively, of leading to a rating upgrade.