Dagong Global Credit Rating Co., Ltd.
January 25th, 2017
Dagong Global Credit Rating Company Limited (“Dagong”) upgraded the issuer credit rating of Ningxia Yuangao Industrial Group Co., Ltd. (hereinafter referred to as “Yuangao Group”) from ‘AA-’ to ‘AA’, maintained its outlook as stable, upgraded the Issue Rating of 2016 Corporate Bond from AA to AA+, maintained the Issue Rating of 2016 First Series Commercial Paper as A-1. The rating results reflect that Yuangao Group’s profitability was strengthened and debt repayment source was consolidated resulting from the increasing demand of wind-tower equipment in the industry that driven by the improved grid-connected system, as well as significant expanding of mineral resources. In addition, Yuangao Group also provided mortgage guarantee upon using mining and licensed vehicles, which would help to enhance the reliability of repayment capacity of its 2016 Corporate Bond.
The main drivers of the ratings are as follows:
1. The operational status of Yuangao Group was improved resulting from growing demand of wind power equipment driven by the improved grid-connected system, and gradually increased copper price since Sep. 2016. Based on the prudent attitude took by the Chinese government and its strong power of execution, the future economic growth would be strongly supported and the process of economic restructuring would be further promoted. Benefit from the strengthening of regulatory support and the improved situation of grid-connected system, the incremental installed capacity of wind power equipment increased with an average of 49% from 2013 to 2015. Since Sep. 2016, the demand of copper products was growing promoted by the continuing process of city construction, resulted in a recovered profitability of copper mining enterprises. Moreover, the government of the Ningxia Hui Autonomous Region has set up a 100 million industrial operation fund, which is used to specifically provide support to improve the financing environment of industrial enterprises. To conclude, Yuangao Group is facing a favorable environment for its future development.
2. Significant product demand, stable distributed selling channels, as well as the acquisition of mineral resources provided a strong support for the continued improvement of Yuangao Group’s wealth creation capacity. This was concretely expressed through the followings: the cutting edge technology of producing wind power equipment in the industry, large-state-owned energy enterprises concentrated customer structure and the long term relations established with customers, as well as the significant increase on installed capacity of wind power equipment. While the market was showing a growing demand, the production capacity was also enlarged after acquisition of two copper mines and one garnet mine in Sep 2016 which brought a total of 300 thousand tons increase of copper reserves, and the production to sales ratio of copper and corundum were both remained within top level of 97% and 99% respectively during the first 11 months of 2016.
3. The revenue as well as profitability of Yuangao Group’s was improving, and financing channels was even more diversified, which strengthen the stabilization of debt repayment source, hence improve the degree of deviation between the debt repayment sources and wealth creation capacity. Yuangao Group’s total profit and operating net cash flow kept increasing as production and sales of wind tower continued to grow, and the service of steel construction projects kept increasing, 4.4 billion rmb of revenue and 0.6 billion rmb of profit were achieved for the first 11 months of 2016, with 33% and 26% growth rate respectively. In addition, the proportion of realizable asset in total asset of Yuangao Group was increased, which enhanced the coverage of the value of realizable asset to short-term debt, and correspondingly supplement the debt repayment source. Moreover, Yuangao Group has established and sustained consolidated relations with most of the banks which it has been cooperated, and has already issued two bonds in capital market, diversified financing channels and free access to bond market allows Yuangao Group. Besides, the government of Ningxia Hui Autonomous Region provides 2% interest subsidy of issuing amount of issued bonds to local enterprises each year, generating a stable external support for Yuangao Group. Yuangao Group also provided mortgage guarantee upon using its mining and licensed vehicles, which would help to enhance the reliability of repayment capacity of its 2016 Corporate Bond.
4. Yuangao Group is considered to have a certain room for further debt financing rely on its better coverage of debt repayment source to outstanding debt. As end of Nov. 2016, Yuangao Group's asset-liability ratio was 50%, interest-bearing debt was 2 billion, which accounted for 50% to total liabilities and debt maturity was concentrated in less than 1 year and from 4 to 5 years. Meanwhile, the expansion of production capacity of wind tower facilities would request further 0.35 billion rmb investment which will bring very limit financing pressure for Yuangao Group. Therefore, with higher wealth creation capability, diversified financing channels and favorable volume of outstanding debt, the strength of debt repayment capability of Yuangao Group is expected to continue increase and accordingly create certain room for future debt financing.
Based on above considerations, Yuangao Group was deemed to have an increased debt repayment capacity. And the acquisitions occurred in 2016 is likely to significantly improve Yuangao Group’s wealth creation capability, therefore, with better expectation on demand and the comfortable level of outstanding debt, Dagong holds a stable outlook to Yuangao Group in the next 1 ~ 2 years.