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Fitch Affirms COFCO HK at 'A-'; Outlook Stable
January 13, 2017 / 8:06 AM / a year ago

Fitch Affirms COFCO HK at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, January 13 (Fitch) Fitch Ratings has affirmed COFCO (Hong Kong) Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A-'; the Outlook on the IDR is Stable. Fitch also affirmed the ratings on the following notes at 'A-': the USD500m notes due 2018 and the USD500m notes due 2023, both issued by Prosperous Ray Limited and guaranteed by COFCO HK; and the USD800m notes due 2019 issued by Double Rosy Limited, guaranteed by Joy City Property Limited and credit enhanced by a keepwell deed and a deed of equity interest purchase undertaking from COFCO HK. Fitch applied a top-down approach using our Parent and Subsidiary Linkage criteria to rate COFCO HK's IDR one level below that of sole owner COFCO Corporation (COFCO) due to their very strong operational and strategic linkages. COFCO's credit level is, in turn, notched down one level from China's Long-Term IDR (A+/Stable) to reflect the very close linkage between COFCO and the State-Owned Assets Supervision and Administration Commission (SASAC). COFCO is the largest vertically integrated trader and supplier of agricultural and food products and services in China, and is 100%-owned by the sovereign via SASAC. KEY RATING DRIVERS Strategic Position Unchanged: COFCO's strategic cooperation with China Grain Reserve Corp (Sinograin), an SOE mainly responsible for managing the country's strategic grain reserves, and consolidation of Chinatex Corp. (Chinatex), a state-owned textile and grains trading group, affirms the company's strategic role in China's food security. Sinograin, COFCO and Chinatex were the three SOEs involved in China's policy grain reserve operations. After consolidating Chinatex, COFCO also became a leading corporation involved in edible oil and cotton, with an 18% market share in China's edible oil processing market and close to 10% share in the global cotton market. Key Role in SOE Reform: COFCO is one of a few key SOEs chosen by the Chinese government to pilot SOE reforms. During the past year, COFCO had cut headquarter costs and reorganised operating subsidiaries into 18 specialised business units that will be given greater autonomy, but also be held more accountable in terms of profitability and operational efficiency. Fitch believes that the pace of SOE reform is likely to be gradual, but COFCO's role in SOE reform further underpins its strategic importance to China's SASAC. Strong Parent/Subsidiary Linkage: COFCO has said it is grooming the Hong Kong unit as its platform for globalisation. COFCO HK accounted for 74% of COFCO's total revenue and 62% of total assets in 2015. COFCO has absolute management control over COFCO HK, including a centralised treasury management. Improving 2016 Performance: COFCO HK's operating profit more than doubled yoy in 1H16, drive by higher commodity prices and better trading performance. In addition, the performance of COFCO's international business has improved. Fitch expects the company to report that this improving trend had continued through 2016. Leverage Remains High: Fitch expects the company to report leverage had improved slightly in 2016, from 2015, due to higher profitability; but we will continue to see its FFO-adjusted net leverage remaining above 10x in the next two to three years. COFCO HK's leverage ratios had remained high at end-2015, following two major overseas acquisitions the past few years. DERIVATION SUMMARY Fitch applied a top-down approach using our Parent and Subsidiary Linkage criteria to rate COFCO HK's IDR one level below that of sole owner COFCO due to their very strong operational and strategic linkages. COFCO's credit level is, in turn, assessed by notching down one level from China's Long-Term IDR to reflect the very close linkage between COFCO and SASAC. COFCO is the largest vertically integrated trader and supplier of agricultural and food products and services in China, and is 100%-owned by the sovereign via SASAC. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: - Low-single-digit EBITDA margins in 2016-2019; - Capex at 2% of revenues; - No major international M&As. RATING SENSITIVITIES Developments that may, individually or collectively, lead to negative rating action include: - Negative rating action on the Chinese sovereign; - Weakening of the linkages between COFCO HK and COFCO; - Weakening of the linkages between COFCO and the sovereign Developments that may, individually or collectively, lead to positive rating action include: - Positive rating action on the Chinese sovereign; - Strengthening of the linkages between COFCO and the Chinese sovereign; - Moves by COFCO to inject other core assets, including COFCO Trading Ltd and China Grains & Logistics Corporation, into COFCO HK, may prompt us to remove the one-notch rating difference between COFCO HK and COFCO. LIQUIDITY Smooth Funding Access: Liquidity is not a concern for COFCO HK due to its close relationship with commercial banks and policy banks in China, access to offshore funding sources, and support from the parent's central treasury practice. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Zhai Director +852 2263 9974 Committee Chairperson Kalai Pillay Senior Director Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017503 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. 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