November 14, 2017 / 1:35 AM / a year ago

Fitch Assigns Shandong Snton First-Time 'BB+' Rating; Rates Proposed USD Notes

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 13 (Fitch) Fitch Ratings has assigned China-based steel tire cords manufacturer Shandong SNTON Group Co., Ltd. (Snton) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook and senior unsecured rating of 'BB+'. Fitch has also assigned SNTON International Finance I (BVI) Company Limited's (Snton Finance) proposed US dollar-denominated senior notes a 'BB+(EXP)' rating. Snton Finance is wholly owned by Snton. The notes are rated at the same level as Snton's senior unsecured rating as they will be unconditionally and irrevocably guaranteed by Snton. The ratings reflect Snton's stable profitability, which is underpinned by its leading market position in its core business of steel tire cords and moderate business diversification across its four major business segments. The Stable Outlook reflects our expectations that profitability in Snton's core businesses will remain stable while its net leverage will remain moderate. KEY RATING DRIVERS Leading Steel Cord Manufacturer: Snton is among China's top-three steel tire cord manufacturers, with significant economies of scale, product leadership and solid business relationships. The domestic steel tire cord industry is concentrated, with the top-three players accounting for more than 60% of total domestic market share and leading the tier-2 camp by a wide margin. Snton's technological leadership, high customer stickiness and high pricing power translate into a profitable and robust business. Snton has higher profitability than its domestic rivals due to better product mix and higher operating efficiency. Its products are aimed towards the mid- to high-end market, whereas its competitors aim at the mid- to low-end. Thus, Snton's steel tire cords carry a significantly higher average selling price and gross profit than the industry average. Moderate to High Entry Barriers: The steel tire cord industry has moderate to high entry barriers as customers (tire manufacturers) typically require five years of testing prior to awarding long-term contracts. The industry's high capital intensity, moderate to high R&D investment requirement and high working capital needs also deter new entrants to the market. Snton's long-term partnerships with leading domestic and global tire manufacturers ensure high customer stickiness and stable profitability in its core business. 2017 FCF to Turn Positive: Fitch expects Snton's free cash flow (FCF) to turn positive in 2017, backed by strong EBITDA generation and limited capex requirements, despite ongoing working capital outflows. This should allow the company to cut FFO adjusted net leverage to below 2x within the next two to three years. Snton's working capital requirements increased significantly when it expanded into optical base film in 2014 due to inventory stockpiling and favourable credit terms for new customers. We expect working capital requirements to remain elevated over the next two to three years. The company has historically not paid dividends and Fitch expects this to continue. Significant External Guarantees: Snton had large external debt guarantees totalling CNY4.1 billion as of 1H17 (2013: CNY4.8 billion), which accounted for around 30% of its total adjusted debt and which Fitch has included in its debt and leverage calculations. Most external guarantees are for the bank loans of other private enterprises in Dongying city, where the company is based. In return, these companies guarantee Snton's debt. A large portion of the guarantees is for Shandong Wanda Group, a private enterprise in Dongying. Snton expects to continue lowering its external guarantees by around CNY200 million-300 million each year. Diversified Revenue Base: Snton has a diversified revenue base, which includes steel tire cords (50% of 2016 revenue), petrochemicals (16%), machinery manufacturing (13%) and optical base films (12%). There is low correlation between Snton's four major segments and its diversified business portfolio limits the company's sensitivity to developments that affect any single product. However, broad economic weakness will still take a toll on all segments. DERIVATION SUMMARY Compared with China Lesso Group Holdings Limited (BB+/Stable), both companies have similar EBITDA and margins and both are domestic industry leaders in their field. However, Snton's core business has higher entry barriers and technological leadership. Lesso has lower net leverage, but has significant business concentration and is geographically confined to southern China. Snton's greater business diversification enables the company to better combat industry cyclicality while maintaining more stable overall profitability. Snton employs a nationwide sales network and also sells to international customers. Fitch projects for both Snton and Lesso to post positive FCF over the next two to three years. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Low single digit revenue growth between 2017 and 2019 - EBITDA margin to remain at around 19% between 2017 and 2019 - Capex of CNY350 million-850 million per year between 2017-2020 - No dividend payouts RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Sustained decline in off balance sheet debt - Sustained positive FCF - FFO net leverage below 1.0x on a sustained basis Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO net leverage above 2.5x for a sustained period - FFO margin below 10% for a sustained period - Significant deterioration in steel tire cord business's market position LIQUIDITY Comfortable Liquidity: Snton had about CNY3.9 billion in cash against CNY4.7 billion in short-term debt at end-2016. The company also maintains around CNY12 billion in credit facilities, of which around CNY7 billion is unused at end-2016. Snton has secure banking relationships with the big four domestic banks as well as smaller banks, such as Ping An Bank Co., Ltd (BB+/Stable), Shanghai Pudong Development Bank (BBB/Stable) and Bank of Communications Co., Ltd. (A/Stable). Snton has reliable access to the domestic bond market but has not accessed equity markets. Contact: Primary Analyst Laura Zhai Director +852 2263 9974 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below