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Credit Alert | 05:45 GMT 14 January 2013 China SOE credits – One for every palate
We provide a framework for spread differentiation among Chinese SOEs The SOEs are attractive against Korean and Hong Kong credits; we recommend an Overweight position Our top picks are concentrated in the oil and gas names and the stronger triple-B space
China has 117 centrally owned SOEs, and not all of them are created equal. Bharat Shettigar, +65 6596 8251 [email protected] The SOEs with USD bonds comprise an increasingly heterogeneous mix of credits. In this report, we outline a framework for differentiation among Jaiparan Khurana, +65 6596 7251 [email protected] credits based on ownership profile, strategic importance, government support, regulatory issues, financial risk, bond language and rating notching.
While China‟s ability to support its SOEs is strong, its willingness to support all of its SOEs is unproven. Hence, it is very important to focus on each SOE‟s fundamental business and financial risk profile, apart from assessing the strength of its government linkage and potential support. EMBI index eligibility is also a key factor for spreads of certain credits. We assign limited importance to the difference in bond structure and language, at least among existing issuers.
China‟s economic growth over the past few years has been driven by leverage, and SOEs have been at the forefront of this trend. Credit metrics for most of the USD bond issuers are currently weaker than in 2009-10. With organic capex and overseas acquisitions expected to remain high, we do not expect an improvement in the next 6-12 months. Low-triple-B credits are most at risk of rating downgrades and spread widening. Longer-term, potential SOE reforms could act as a negative for some credits, as they may lose their protected market positions and easy access to financing.
The low USD yield environment, overseas acquisitions, diversification of funding channels and extension of debt maturity drove the huge issuance
from SOEs in 2011 and 2012. However, domestic rate cuts in H2-2012 and the rapid development of the local corporate bond market may preclude Top picks some offshore issuance going forward. We expect c.USD 16.5-17.5bn of CNOOC 21 CNPCCH 41 issuance in 2013, broadly similar to the USD 17.15bn printed in 2012. CHRESO 17 SINOCH 40 China SOEs currently offer a 30-70bps pick-up over US credits on a ratings- CHINAM 22 adjusted basis. Also, the valuations of Chinese SOEs are marginally CHIOLI 20
attractive versus Korean and Hong Kong credits. We therefore recommend Top pans an Overweight position in the context of the Asian high-grade space. That CNOOC 42 said, significant spread tightening from here will be contingent on overall COSL 22 CRHZCH 16 market technicals remaining overwhelmingly positive. CHMETL 16 CITPAC 21/23 We recommend that investors stay invested in the highly rated oil and gas names and take some balance-sheet risk by investing in stronger triple-B credits like Sinochem, China Merchants and China Overseas Land. We are slightly concerned about names like China Metal, Yanzhou Coal and CITIC Pacific and recommend an opportunistic approach to these credits.
Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2013 research.standardchartered.com
Credit Alert
Credit spread differentiation There has been a spate of offshore issuance by Chinese SOEs since late 2010, and the space now comprises an increasingly heterogeneous mix of companies. This is unlike other countries in Asia, where most quasi-sovereigns with USD bonds enjoy high strategic importance and an almost certain likelihood of government support. Hence, in China‟s case, it is equally important to focus on an SOE‟s fundamental business and financial risk profile as it is to assess the strength of its government linkage and potential support. We believe rating agencies have done a fairly good job of differentiating between the credits, rating them from as high as Aa3/AA- to as low as Ba1/BB+ (in other jurisdictions, most quasi-sovereigns are rated close to the sovereign). From our standpoint, there are five factors that determine spread differentiation in the space; the first three are the most critical. 1. Business risk profile: We assess business risk based on the perceived importance and prospects of the industry, the company‟s competitive position, operational risks and regulatory considerations. Typically, energy, utility and infrastructure companies score higher than companies in more competitive industries like commodities and property. 2. Financial risk and policies: To assess financial risk, we look at a number of ratios that measure the company‟s capital structure and cash-flow adequacy. Financial risk tolerance policies also play an important role; for instance, CR Gas‟ part-financing of its acquisition through equity issuance and CR Power‟s scaling-back of investments to protect its ratings are important considerations. 3. Strategic importance and support: China‟s SOEs have received preferential treatment in the form of capital injections, operational support and easier access to financing. However, in most cases, individual SOEs have not been established under a clear regulatory mandate. Some could undergo restructuring or see their protected market positions eroded over the medium to long term. In addition, China‟s willingness to support its SOEs (and their offshore creditors) is unproven. We also point out that close government linkages can act as a double-edged sword. For instance, while CITIC Pacific and China Metal are of „moderate‟ strategic importance (according to our definitions), they have been required to undertake large overseas projects, which have impacted their credit risk profiles. Finally, we do not differentiate much between SOEs owned by the central government and those owned by local governments. As a result, for credits like Shenzhen International and Yanzhou Coal, business and financial risk are bigger determinants of credit standing than their ownership. 4. Index eligibility: The Sinopec, Sinochem and China Metal bonds are guaranteed by entities that are 100% owned by the government. They are therefore the only Chinese SOEs included in the EMBI index, which acts as a positive technical. The Sinopec bonds quote tighter than CNOOC and CNPC, despite their lower ratings. That said, EMBI-focused investors may choose to ignore small bond issues from weaker entities like China Metal. 5. Bond structure: Since Chinese corporates have to undergo stringent regulatory approvals to issue offshore debt, some of them have created differentiated bond structures to make investors more comfortable. Among existing issuers, only Sinopec, China Oilfield, Yanzhou Coal and China Metal have their bonds guaranteed by onshore entities. Some bonds have a „keep-well agreement‟ or „letter of support‟, while the change-of-control language varies widely among the issuers. While these differences may eventually prove important for spread differentiation among lower-quality SOEs, we believe the first four factors mentioned above are far more important for the existing set of issuers.
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Credit Alert
Figure 1: Summary credit profile Govt. Strategic Financial
ownership importance profile Sinopec 100.0% High Moderate CNOOC 64.4% High Strong CNPC 100.0% High Strong China Oilfield 53.6% Moderate Moderate CR Gas 68.5% Moderate Moderate Beijing Enterprises 59.3% Moderate Moderate Sinochem 100.0% High Weak China Merchants Holdings 54.7% Moderate Moderate China Overseas Land 29.2% Moderate Moderate CR Power 63.6% Moderate Moderate CR Land 68.0% Low Moderate Shenzhen International 48.6% Moderate Moderate Yanzhou Coal 52.9% Moderate Moderate China Metal 100.0% Moderate Weak Franshion 62.9% Low Moderate CITIC Pacific 57.6% Moderate Weak
Sources: Companies, Standard Chartered Research
Figure 1 summarises the overall credit standing of China‟s SOEs with USD bonds outstanding. In Figures 5-12, we provide a detailed comparison of these entities based on factors such as rating notching, ownership profile, strategic importance, government support, regulatory issues, financial risk profile and bond language. Based on these comparisons, we accord fair-value spread multiples for the various entities, as shown in Figure 2 below.
We start with Sinopec and work our way down the credit spectrum. Figure 2 indicates a company‟s fair Z-spread multiple versus the companies placed immediately above it. For instance, we believe Sinochem‟s Z-spreads should be 1.10-1.25 times those of China Oilfield, CR Gas or Beijing Enterprises on a duration-adjusted basis, while Shenzhen International‟s spreads should be 1.1-1.3 times CR Land‟s. As we move towards the lower rung of credits in the crossover/high-yield category, it gets more difficult to assess fair spreads; we therefore assign a wider range for the multiple. Also, our assessment of these credits could change over the next few months depending on movements in their credit fundamentals and ratings. We also show spread multiples for CR Cement and China COSCO. While we do not formally cover these companies, these multiples pertain to their credit-enhanced bonds (through DBS Bank‟s Hong Kong branch and Bank of China‟s Beijing branch, respectively) and are not based on their standalone credit fundamentals.
Figure 2: Fair spread multiples in the 5-10Y maturity bucket Credit-enhanced Senior bonds Multiple Multiple bonds Sinopec 1.00 CNOOC/CNPC 1.05-1.15 China Oilfield/CR Gas/Beijing Enterprises 1.15-1.30 CR Cement 1.15-1.30 Sinochem 1.10-1.25 China COSCO 1.10-1.25 China Merchants/China Overseas 1.05-1.25 Land/CR Power CR Land 1.05-1.15 Shenzhen International 1.10-1.30 Yanzhou Coal 1.10-1.25 China Metal/Franshion 1.15-1.40 CITIC Pacific 1.10-1.25
Note: The numbers indicate the fair spread multiple for a company versus the companies placed immediately above it. Source: Standard Chartered Research
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Sinopec We believe the Sinopec bonds should trade the tightest among existing Chinese SOE bonds. They are guaranteed by the 100% government-owned onshore entity and are therefore eligible for inclusion in the EMBI index. This will remain a significant positive technical for the bonds, even though the company‟s business profile and financial metrics are marginally weaker than those of CNOOC and CNPC.
Sinopec‟s operations are skewed towards the downstream sector and, given the company‟s low crude oil self-sufficiency and government control of fuel prices, its profitability has been under pressure. It is investing significantly in E&P assets, and leverage (currently 2x) could worsen somewhat in 2013. The company‟s final ratings benefit from a four-notch uplift from Moody‟s and a two-notch uplift from S&P, although S&P‟s final rating is one notch lower than the sovereign rating.
CNOOC While CNOOC‟s operations are smaller in scale and it is not vertically integrated like Sinopec and CNPC, its track record of solid performance in the upstream E&P segment has led strong cash-flow generation, low leverage (0.5x) and a net cash position since 2001. However, these financial metrics will moderate on completion of the Nexen acquisition. With 55% of its reserves still undeveloped, capex will remain high in the next few years. We believe the company has limited rating headroom for another Nexen-type debt-funded acquisition.
CNPC CNPC‟s overall credit profile is better than those of CNOOC and Sinopec due to its larger scale, integrated operations and very high strategic importance. All three rating agencies have accorded it a higher standalone rating, and Moody‟s has a positive outlook on the company‟s ratings, in line with the sovereign. We expect large capex and aggressive overseas acquisitions to result in CNPC‟s debt/capital rising to 30- 35% from 24% in the next couple of years. However, this is unlikely to put pressure on its ratings.
The CNPC bonds are issued by the offshore entity and enjoy only a keep-well agreement, with no explicit guarantee from CNPC. Hence, we believe they should trade marginally wider than the CNOOC (and Sinopec) bonds.
China Oilfield Given the large capex for expansion of the rig fleet and investments in other assets, China Oilfield‟s leverage is likely to increase to 4x over the medium term. Hence, Fitch‟s A rating appears slightly generous, and we believe Moody‟s A3 assessment is more reflective of the credit (note that Moody‟s rates it Baa3 on a standalone basis and accords a three-notch rating uplift due to the close sovereign linkage). For spread differentiation purposes, we would place China Oilfield slightly ahead of CR Gas and Beijing Enterprises. While their utility businesses result in strong and stable cash flow, China Oilfield‟s importance to the central government is higher.
CR Gas CR Gas has maintained strong financial metrics, with a net cash position since 2010. Also, the incubation strategy of its parent, China Resources Holdings, has lowered execution risks in a number of its projects. While large investment spending will lead to a moderation of credit metrics in 2013-14, the recent equity raising exhibits the company‟s prudent financial risk management. Hence, we believe it should trade marginally tighter than Beijing Enterprises.
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Beijing Enterprises Beijing Enterprises enjoys solid market positions in non-cyclical businesses. While its financial track record has been good, leverage levels have moderated in the past two years due to rising capex. S&P rates Beijing Enterprises A-, with a one-notch uplift on account of its close links to the government. However, there are uncertainties regarding potential asset injections and the company‟s business mix in the medium to long term. We therefore believe it should trade marginally wider than CR Gas.
Sinochem Sinochem‟s financial metrics are very weak for its ratings – in fact, both Moody‟s and S&P rate it non-investment grade on a standalone basis. However, its strategic importance is high, since it is China‟s largest importer and distributor of fertilisers and one of the country‟s largest importers of crude oil. Also, its earnings profile has improved due to its expansion into upstream oil and gas operations. Finally, it is among only three Chinese SOE credits included in the EMBI index. As a result, we believe it should trade like a strong triple-B credit.
China Merchants Holdings China Merchants Holdings has a well-diversified portfolio of port assets and a long track record of steady earnings. However, its credit metrics are likely to deteriorate slightly in 2013-14 as it undertakes large port projects in Colombo and Togo. The company has maintained its ratings since 2005, despite the inherent cyclicality of the industry. Barring large acquisitions, we expect it to remain a triple-B flat credit.
China Overseas Land We see China Overseas Land as having the strongest credit profile among the Chinese property developers in the USD bond space. It has a strong record of efficient property development, solid credit metrics, and a proven track record in the offshore capital markets. Given that macro risks surrounding the Chinese property sector (both real and perceived) have receded, we expect the bonds to remain well supported. Hence, we believe it should trade at broadly similar levels to China Merchants Holdings.
CR Power While CR Power has strong operating efficiency, it accounts for only 2% of the country‟s power generation capacity, and its strategic importance is moderate at best. Government control of power tariffs has affected the company‟s earnings. However, its track record of raising equity/hybrid capital and its flexibility to partly defer capex suggest that its financial metrics will not deteriorate materially. CR Power‟s bonds are rated one notch lower than those of China Merchants Holdings and China Overseas Land. We therefore believe its senior bonds should trade marginally wider than those of the other two.
CR Land CR Land benefits from a high-quality and growing investment portfolio, strong parental support and a higher effective stake owned by China‟s State Council relative to China Overseas Land. However, it is smaller in scale and has weaker financial metrics. Hence, we believe it should trade wider than China Overseas Land.
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Credit Alert
Shenzhen International Strong earnings momentum in recent years has helped to improve Shenzhen International‟s financial metrics. However, regulatory risks are rising, and recent tariff cuts will lower revenue by 9-10% in 2013. We expect the company to cover its investments within operational cash flow, and our base case is that the company will maintain its ratings. However, there is a risk of large investments in the logistics and other businesses. Given these factors, we believe the bonds should trade at the lower end of the investment-grade spectrum.
Yanzhou Coal Yanzhou Coal enjoys a strong operational profile in China, although large debt- funded investments in recent years have moderated its balance-sheet strength. Investment spending will remain high in 2013, and any sharp decline in coal prices may lead to ratings pressure. We see its business profile as weaker than Shenzhen International‟s, while its earnings profile will be more volatile. Given that S&P has a negative outlook on the credit, we expect Yanzhou Coal‟s bonds to trade wider than those of Shenzhen International.
China Metal While China Metal has a dominant position in metallurgical projects, its non- metallurgical projects have stretched working-capital requirements, while overseas mining projects will require large investments in the next few years. We see a high likelihood of the company being downgraded to non-investment grade if it does not post free cash flow in the next couple of quarters. While the bonds are included in the EMBI index, technical support is likely to be low given the small issuance size.
Franshion On a fundamental basis, Franshion is a stronger credit than CITIC Pacific. Its niche positioning and strong investment portfolio of commercial properties and hotels offset its modest cash-flow protection metrics and large capital investment plans. The company‟s close links with and significant profit contribution to Sinochem are also important supportive factors for the credit. Hence, we expect it to trade as a high non- investment-grade credit and close to China Metal.
CITIC Pacific We see CITIC Pacific as a clearly non-investment grade credit, and it should therefore trade wider than the rest of the Chinese SOE space. While it is strategically important to the CITIC Group, it does not enjoy a leading position in its businesses. Although its capex is peaking, we do not expect the company to post free cash flow in 2013. Also, its overall credit profile is unlikely to stabilise until a few lines of the Sino-Iron project ramp up and start generating cash flow.
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Credit Alert
Figure 3: 5Y sector bonds Figure 4: 10Y sector bonds (Duration, Z-spread) (Duration, Z-spread) 500 500 CITPAC 18 CITPAC 23 450 450 CITPAC 21 FRANSH 17 FRANSH 21 400 400 CHMETL 16 350 350 YZCOAL 22 300 YZCOAL 17 300 250 SZIHL 17 250 200 CHIOLI 17 CHINAM 15 CHIBEI 16 CHIOLI 20 CHINAM 22 CHIOLI 22 RESOPW 15 150 200 SINOCH 20 COSCO 22 CHRESO 17 BEIENT 21 BEIENT 22 CNOOC 21 CHIRES 22 COSL 22 CNPCCH 16 CNPCCH 17 SINOPE 17 150 100 CNPCCH 22 CNOOC 22 CNPCCH 21 SINOPE 22 50 100 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 6.0 6.5 7.0 7.5 8.0 8.5 Source: Standard Chartered Research Source: Standard Chartered Research
Figure 5: Chinese SOEs’ relative value across the curve
500 CITPAC 18 CITPAC 23 450 CITPAC 21 FRANSH 17 FRANSH 21 400 CHMETL 16 YZCOAL 22 350
300 YZCOAL 17 250 SZIHL 17 CHIOLI 42
spread (bps) spread CHINAM 22 SINOCH 40 - CHIOLI 20 Z CHIOLI 22 200 CHINAM 15 CHIOLI 17 COSCO 22 BEIENT 41 CHIBEI 16 SINOCH 20 BEIENT 22 CHIRES 22 BEIENT 21 CNPCCH 41 150 RESOPW 15 CNOOC 21 COSL 22 CNOOC 41 CHRESO 17 CNPCCH 21 CNOOC 22 CNPCCH 17 CNPCCH 22 100 CNPCCH 16 SINOPE 22 SINOPE 17 50 1.5 3.5 5.5 7.5 9.5 11.5 13.5 15.5 Duration (yrs) Sources: Bloomberg, Standard Chartered Research
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Credit Alert
Figure 6: Bond views Bid Bid Bond view Z-spread YTM SINOPE 17 98 1.73 The SINOPE curve still offers a 30-60bps pick-up over US oil and gas names with similar SINOPE 22 117 2.92 ratings. While the bonds will remain well supported, we prefer CNOOC/CNPC at current levels. SINOPE 42 137 4.10 CNOOC 21 153 3.05 CNOOC will look to part-fund the Nexen acquisition through the bond markets, and we expect at CNOOC 22 140 3.14 least USD 2.5-3bn of supply in the next few months. The 10Y sector appears cheap against CNOOC 41 146 4.15 SINOPE, and we like the CNOOC 21 and CNOOC 22. However, the 10-30Y credit curve is very flat, and we see the CNOOC 41 and CNOOC 42 as a bit tight. CNOOC 42 142 4.15 CNPCCH 16 106 1.60 CNPCCH 17 104 1.78 The CNPC curve appears fair against SINOPE and CNOOC in the 5-10Y sector. That said, the CNPCCH 21 140 2.96 10-30Y curve for CNPC is much steeper, and we see the CNPCCH 41 as marginally cheap at current levels. CNPCCH 22 133 3.06 CNPCCH 41 164 4.32 The bond offers a 55-60bps pick-up over the DBSSP 17, which we see as attractive in this tight CHRESO 17 134 2.18 spread environment. COSL 22 152 3.33 The COSL bonds continue to trade a bit tight given the company‟s strong linkage with CNOOC. CHIRES 22 156 3.27 The CHIRES bond appears fair in the context of the high triple-B space in Asia. BEIENT 21 174 3.29 BEIENT 22 165 3.37 The BEIENT curve appears marginally attractive, especially the BEIENT 21. BEIENT 41 205 4.70
SINOCH 20 185 3.32 The SINOCH 10-30Y curve is among the steepest in Asia, offering a pick-up of over 50bps. SINOCH 40 236 5.00 Hence, the SINOCH 40 is among our top picks. COSCO 22 201 3.83 The bond appears fair against the China bank 10Y sector.
CHINAM 15 186 2.25 The CHINAM 22 is trading slightly cheap for its fundamentals. While the shorter-dated CHINAM CHINAM 22 218 3.89 15 appears more attractive, the bonds are relatively illiquid. CHIOLI 17 199 2.68
CHIOLI 20 221 3.67 The CHIOLI 20 is our top pick along the curve. It offers a decent spread and yield for a bond in CHIOLI 22 213 3.95 the 7Y sector. CHIOLI 42 249 5.17
RESOPW 15 167 2.10 The senior bond appears marginally attractive for its fundamentals, though liquidity on the paper RESPOW 49 492 5.49 is poor. CRHZCH 16 183 2.38 The bond is slightly tight for its fundamentals as compared to the CHIOLI 17. SZIHL 17 255 3.28 The bond appears fair given regulatory risks and the negative rating outlook from S&P. YZCOAL 17 281 3.55 We expect the bonds to remain volatile till the rating overhang is cleared. YZCOAL 22 353 5.22 CHMETL 16 372 4.30 The bonds could see a downside if there is a rating downgrade to non-investment grade. FRANSH 17 416 5.00 The credit curve is extremely flat and it is better to hold the FRANSH 17 than the FRANSH 21. FRANSH 21 418 5.67 CITPAC 18 485 5.71
CITPAC 21 462 6.12 The CITPAC credit curve is extremely flat. We have a Negative outlook on the credit, and it CITPAC 23 488 6.63 could see further rating downgrades. Hence, the CITPAC 21 and 23 spreads could widen. CITPAC 49 713 7.69 Source: Standard Chartered Research
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Credit Alert
Comparison of credit fundamentals Credit metrics for Chinese SOE‟s have moderated across the board due to debt- funded investments for domestic expansion and overseas acquisitions. For the 16 companies with USD bonds under our coverage, aggregate debt has increased at a CAGR of 26% since 2005, compared with EBITDA growth of only 12%. While overseas acquisitions have provided diversification for some, they have created significant execution risks for companies like China Metals and CITIC Pacific. Also, government control of tariff and commodity prices has affected profitability in some cases. Looking ahead, we do not expect a major rebound in profitability; this, combined with continuing large investments, will keep leverage elevated in 2013.
Figure 7: Deteriorating leverage and coverage Figure 8: Moderation of Altman Z-score X – LHS, x – RHS 1.8 35 8.5
Debt/EBITDA 8.0 1.5 30
7.5 1.3 25 7.0
1.0 20 Altman Z 6.5 EBITDA/intere 0.8 st (RHS) 15 6.0
0.5 10 5.5 H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 Source: Standard Chartered Research Source: Standard Chartered Research
Figure 9: Company ratings and notching Moody’s S&P Fitch
Final Notch-up Notch-up Notch-up BCA Final rating SACP Final rating Standalone rating (down) (down) (down) China FC rating Aa3/Pos - - AA-/Sta - - A+/Sta - - Sinopec Aa3/Sta Baa1 4 A+/Sta a- 2 NR - - CNOOC Aa3/Sta A2 2 AA-/Sta a 2 A+/Sta A 1 CNPC* Aa3/Pos A1 1 AA-/Sta aa- 0 A+/Sta AA (2) China Oilfield A3/Sta Baa3 3 NR - - A/Sta 0 0 CR Gas Baa1/Sta Baa3 2 NR - - BBB+/Sta BBB 1 Beijing Enterprises Baa1/Sta Baa1 0 A-/Sta bbb+ 1 NR - - Sinochem Baa1/Sta Ba2 4 BBB/Sta bb 3 BBB+/Sta BBB- 2 China Merchants Holdings Baa2/Sta NA NA BBB/Sta bbb 0 NR - - China Overseas Land Baa2/Sta Baa2 0 BBB/Sta bbb 0 NR - - CR Power* Baa2/Sta Baa3 1 BBB/Neg bbb- 1 NR - - CR Land Baa2/Sta Baa2 0 BBB/Sta bbb 0 NR - - Shenzhen International** Baa3/Sta Baa3 0 BBB/Neg bbb- 1 NR - - Yanzhou Coal Baa3/Neg Baa3 0 BBB-/Sta bb+ 1 BBB-/Sta BBB- 0 China Metal Baa3/CWN Ba2 2 BBB-/Neg bb 2 NR - - CITIC Pacific Ba1/Neg Ba3 2 BB+/Neg b+ 3 NR - - Franshion* Baa3/Neg Ba1 1 BB+/Sta bb+ 0 BBB-/Sta BBB- 0
*Senior bonds are rated one notch lower by Moody’s and S&P; **senior bonds are rated one notch lower by S&P; Sources: Rating agencies, Standard Chartered Research
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Figure 10: Ownership profile Govt. holding Details (direct and indirect) Sinopec 100.0% Stake directly owned by SASAC
CNOOC 64.4% Stake owned by CNOOC Corp., which is 100% owned by SASAC
CNPC 100.0% Stake directly owned by SASAC
China Oilfield 53.6% Stake owned by CNOOC Corp., which is 100% owned by SASAC Stake owned by China Resources Holdings, which is ultimately 100% owned by CR Gas 68.5% SASAC Beijing Enterprises 59.3% Stake owned by Beijing Enterprises Group, which is 100% owned by Beijing SASAC Wholly owned by Sinochem Corp., which is 98% owned by SASAC and 2% owned by Sinochem 100.0% COSCO Group (100% owned by SASAC) China Merchants 54.7% owned by China Merchants Group Ltd., which is ultimately 100% owned by 54.7% Holdings SASAC 53.2% owned by China State Construction Engineering Corp. Ltd., which in turn is China Overseas Land 29.2% 54.9% indirectly owned by SASAC Stake owned by China Resources Holdings, which is ultimately 100% owned by CR Power 63.6% SASAC Stake owned by China Resources Holdings, which is ultimately 100% owned by CR Land 68.0% SASAC Shenzhen Stake owned by Shenzhen Investment Holdings Co. Ltd., which is 100% owned by 48.6% International Shenzhen SASAC Yanzhou Coal 52.9% Stake owned by Yankuang Group, which is 100% owned by Shandong SASAC
China Metal 100.0% Stake directly owned by SASAC
CITIC Pacific 57.6% Stake owned by CITIC Group, which is ultimately 100% owned by SASAC
Franshion 62.9% Stake owned by Sinochem HK, which is 100% owned by SASAC
Sources: Respective companies, Standard Chartered Research
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Credit Alert
Figure 11: Strategic importance
Importance Comments
Sinopec accounts for 60% of China‟s refined oil supply, 70% of its crude oil imports and 60% of its ethylene production. Separately, it ranks first in terms of revenue Sinopec High among the central SOEs supervised by SASAC, and its tax payments accounted for 3.2% of China‟s fiscal income in 2011. CNOOC is strategically important to China given its role in developing offshore oil and CNOOC High gas reserves, and it will likely be used as a vehicle to support China‟s long-term energy security goals. Of the entities owned by SASAC, CNPC is the largest in terms of assets and the second largest in terms of revenue. CNPC accounts for 70% of China‟s petroleum CNPC High reserves and 60% of its oil and gas production, and is the largest importer of crude oil and refined products. COSL provides most of the oilfield and drilling services for CNOOC Group, which China Oilfield Moderate plays an important role in China‟s energy sector. One of China‟s largest city-gas distributors. Plays an important role in promoting the CR Gas Moderate government‟s policy of using natural gas. The company is the primary listed vehicle of the Beijing municipal government for Beijing Enterprises* Moderate raising capital to fund public utility projects. Sinochem Group is one of China‟s largest SOEs. It is the largest importer and Sinochem High distributor of fertilisers and one of the largest crude oil importers (c.10% share). It also operates strategic oil and fertiliser reserves on behalf of the government. Leading investor/operator in the ports sector. However, it operates in a competitive China Merchants Holdings Moderate industry and has minority stakes in most of its projects. The company has a strong position and a well-established brand name in the property China Overseas Land Moderate market, although its share is less than 1% given the fragmented nature of the market. The company accounts for only 2% of China‟s power generation capacity, although it CR Power Moderate is among the most profitable IPPs. The company is important for CR Holdings, since it is a major contributor to cash flow. Is among the many property companies in China, although it is important for CR CR Land Low Holdings given the high contribution to profits. Has a 60% market share in toll roads in Shenzhen and is the primary vehicle for Shenzhen International* Moderate logistics investments. Yanzhou is among the largest SOEs in Shandong and accounts for more than 10% of Yanzhou Coal* Moderate total revenue and assets among all provincial SOEs. One of the largest engineering and construction companies in China, with a dominant position in steel plants. It plays a significant role in enhancing the competitiveness of China Metal Moderate China‟s steel industry, developing low-income housing, and investing in overseas mining assets. The company does not have leading market positions in any of its businesses. That CITIC Pacific Moderate said, it is an important part of CITIC Group. Is among the smaller property companies in China, although strategically important for Franshion Low the Sinochem Group given the significant contribution to profits.
*The ‘moderate’ strategic importance of Beijing Enterprises, Shenzhen International and Yanzhou Coal relates to their strategic importance to their respective municipal governments; Source: Standard Chartered Research
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Credit Alert
Figure 12: Regulatory issues
Details of regulatory issues
Sinopec‟s crude oil self-sufficiency is only c.26%, and the government controls retail fuel prices in China. The timing and extent of refined product price adjustments did not match the spike in crude oil prices in 2008 and 2011, and the Sinopec segment posted large EBIT losses. The government adjusted product prices seven times in 2012 due to easing inflation. CNOOC has the exclusive right to enter into PSCs with foreign partners offshore China and has the right (through its parent) to acquire a stake of up to 51% in any block where petroleum has been discovered by the foreign partner. CNOOC That said, the government imposed a special oil levy in 2006, and CNOOC‟s outlay on this represented 30.2% of its pre-tax profit in H1-2012. The government controls fuel prices, and CNPC is unable to pass on higher oil prices to consumers. In the gas CNPC pipeline business, while the fixed transmission tariff leads to strong cash flow, wholesale tariffs are determined by the government, and CNPC suffers losses on sales of imported gas (20% of its volumes). COSL provides most of the oilfield and drilling services for CNOOC Group (though not under any regulatory China Oilfield mandate). Government regulations prevent foreign companies from providing certain services such as geographic investigations and gravity tests. Upstream gas prices are controlled by the central government, while end-user tariffs are governed by local governments. The last wellhead price increase was in June 2010, and CR Gas was able to pass through the higher CR Gas costs for c.95% of its gas volumes. CR Gas‟ connection fees may be reduced or eliminated in some projects in the future.
Upstream gas prices are controlled by the central government, while end-user tariffs are governed by local Beijing Enterprises governments. Its connection fees may be reduced or eliminated in some projects in the future.
Domestic prices of potash fertiliser are government-controlled; this limits Sinochem's ability to pass through cost Sinochem increases in imported potash fertiliser. It also has a mandate to stockpile off-season fertiliser reserves, which exposes it to inventory risks (and led to an EBITDA loss of HKD 2.5bn in 2009).
China Merchants Operates in a competitive market and is not materially affected by regulatory issues. Holdings
The company could be affected by a further tightening of regulatory measures in the residential property segment. China Overseas Land However, its strong brand and land-bank diversity mitigate the risks.
The electricity tariff mechanism is not transparent and leads to inconsistent tariff changes across regions. A full cost- CR Power pass-through system is unlikely to be implemented in the near term.
The company could be affected by a further tightening of regulatory measures in the residential property segment. CR Land However, its geographic and product diversity and large investment portfolio mitigate the risks.
The tariff-setting mechanism in China lacks transparency, and the provincial government of Guangdong has not Shenzhen adjusted toll rates for over 10 years. In June 2012, the government decided to standardise toll co-efficients for all International expressways, and in August 2012, the State Council decided to waive toll fees nationwide for passenger cars during four important national holidays. The two measures will lower SZIHL‟s revenue by c.9-10%. The central government is considering a nationwide resources tax, which could impact earnings. Also, in 2012, the Yanzhou Coal government restricted the increase in the contracted ASP for thermal coal contracts; Yanzhou has reduced its exposure to government contracts in recent years.
The majority of its non-metallurgical projects are from municipal governments, which are in poor financial health. China Metal Also, a number of its mining projects are not undertaken on purely commercial considerations.
CITIC Pacific The company's businesses are not significantly affected by government regulations.
Regulatory measures impact the company less than peers given its niche projects and strong investment portfolio of Franshion commercial properties and hotels.
Source: Standard Chartered Research
GR13JA | 14 January 2013 12
Credit Alert
Figure 13: History of support
Government and parent support
Sinopec received CNY 50bn in subsidies to compensate for its refining segment‟s losses in 2008. It has also Sinopec received continued equity infusions from the government (15% of current equity was infused during 2007-11) and diplomatic support for overseas acquisitions.
CNOOC No government support in the past few years. Has received political assistance during overseas acquisitions.
The government's diplomatic efforts give CNPC easier access to politically riskier countries in West Africa and the CNPC Middle East. In 2008, the government provided CNY 20bn in subsidies to compensate for losses in its refining segment. CNOOC provided a CNY 2bn credit facility to COSL in 2009 and has helped it gain easier access to the domestic China Oilfield bank and bond markets. Also, CNOOC recently developed the HYSY981 (China‟s first ultra-deepwater semi- submersible drilling rig) at a cost of CNY 6bn, and delivered it to COSL for operation under a management contract. CR Gas has received strong support as part of an „incubation strategy‟, under which CRH transfers only profitable CR Gas projects to CR Gas after a three- to four-year incubation period. CR Gas has also been able to acquire city-gas projects through negotiated contracts with local governments (avoiding competitive bidding). The Beijing municipal government restructured BEH during 2005-07 and injected Beijing Gas into BEH while Beijing Enterprises spinning off some non-core assets. This improved the overall business and financial profile. However, the type and quality of further asset injections could pose risks. Sinochem Group has provided capital injections, inter-company loans and loan guarantees in the past. In H1-2012, it Sinochem received a HKD 1.2bn capital injection, and the government provides annual subsidies for Sinochem Group‟s fertiliser business. While the company is ultimately owned by SASAC, it has a long history of independent management, and its China Merchants operations are largely commercially driven. That said, it has received support from CMG in the form of low-interest- Holdings rate financing and subscription to scrip dividends instead of cash dividends.
Has enjoyed capital injections from the parent, China Overseas Holdings Ltd., over the past few years. Also enjoys China Overseas Land better access to onshore bank funding given its SOE status.
No direct financial support in the past few years. However, the parent‟s government linkage helps the company with CR Power project approvals and bank financing.
New investment properties are held in CR Holdings' balance sheet and then transferred to CR Land; this reduces CR Land development risks and construction costs. During 2004-11, it received a total of HKD 37bn of asset injections. In 2008-09, it received HKD 10.8bn of capital infusions from CR Holdings. The government has injected various logistics and toll-road projects into the company. In 2008, it extended the Shenzhen interest-free payment period for SZIHL‟s acquisition of Shenzhen Expressway, and in 2010, it converted SZIHL‟s International convertible bonds into equity.
No direct financial support in the past few years. However, government linkage has helped it expand in other Yanzhou Coal provinces, and it enjoys strong access to the local bank and bond markets.
Has received funding support from state-owned banks and CNY 3bn in government subsidies and capital injections China Metal since 2008.
CITIC Group provided support in December 2008 by assuming FX derivatives liabilities of HKD 9.2bn and CITIC Pacific subscribing to HKD 11.6bn of equity, increasing its stake to 57.6% from 29%. Also, CitPac has been selling some of its non-core assets to its parent in order to improve its credit metrics.
Strong support from Sinochem in the form of underwriting equity issuance and the injection of property assets into Franshion the company. The bonds have a Letter of Support from Sinochem.
Source: Standard Chartered Research
GR13JA | 14 January 2013 13
Credit Alert
Figure 14: Standalone financial profiles
Financial profile Details
Financial profile is tempered by the poor profitability of its refining operations, and its Sinopec Moderate metrics are weaker than CNOOC‟s and CNPC‟s. While debt levels increased by CNY 107bn during 2010-11, debt/capital has been stable at c.38% since 2009. Has maintained a net cash position since 2001. However, the Nexen acquisition will CNOOC Strong cause debt/capital to increase to 26% from 16.2% and leverage to increase to 0.7-08x from 0.5x. Large scale and solid operational profile have helped maintain financial metrics. The CNPC Strong expansion of its overseas portfolio and domestic capex will lead to continuing negative free cash flow and a gradual increase in leverage levels. COSL‟s excellent balance-sheet structure moderated with the CNY 17.1bn debt- funded acquisition of Awilco in 2008. Capital spending will rise significantly starting in China Oilfield Moderate 2013, and we forecast that debt/EBITDA will increase to around 4x in the next two years. CR Gas has been able to maintain very healthy financial metrics, with a net cash CR Gas Moderate position since 2010. However, given the large investment plans, we expect a gradual deterioration in financial metrics over the next two years. Enjoys relatively secure cash flow due to good market positions and steady cash flow Beijing Enterprises Moderate in the gas and brewery businesses. However, leverage will remain high due to the large capex plans and high dividend payouts. Thin profit margins and consistently negative free cash flow in the past few years. Sinochem Weak While growth in the oil and gas business will improve earnings capability, leverage levels are unlikely to improve materially due to its large investment appetite. While earnings are somewhat cyclical, the company has maintained a steady capital China Merchants Moderate structure by adjusting investment spending in line with cash flow. Given large capex in Holdings overseas port projects, credit metrics are unlikely to improve materially near-term.
Consistently solid operating performance and disciplined financial management have China Overseas Land Moderate led to credit metrics being stronger than property-sector peers‟.
The absence of a cost-pass-through mechanism and large capex plans will keep CR Power Moderate leverage levels elevated in the next two years.
Aggressive expansion in the past four years has increased leverage. We expect the CR Land Moderate balance sheet to improve gradually as the company tries to manage capex and investments in line with operational cash flow. The strong growth in toll-road traffic has helped SZIHL improve its leverage levels. Shenzhen Moderate While budgeted capex can be accommodated within operating cash flow, potential International investments in the logistics business need monitoring. Large investments and acquisitions in recent years have been largely debt-funded, Yanzhou Coal Moderate leading to a moderation in credit metrics. Its ambitious production target will keep leverage elevated near-term. Debt has increased significantly since 2008 due to high working-capital requirements China Metal Weak and large investments in overseas resources projects. Leverage metrics are unlikely to improve in 2013. Large investments in the iron ore project have led to a massive increase in debt levels. CITIC Pacific Weak While capex is peaking, we expect FCF to remain negative in 2013 and credit metrics to remain weak.
Although profitability has been strong due to high recurring income, cash-flow Franshion Moderate protection metrics are moderate due to large investments and volatile property sales.
Source: Standard Chartered Research
GR13JA | 14 January 2013 14
Credit Alert
Figure 15: Summary credit metrics Capex Debt/capital Debt/EBITDA EBITDA CNY mn Revenue EBITDA Assets Total debt and inv. (%) (x) cover (x) 2011
Sinopec 2,551,951 221,992 1,745,307 436,912 (243,774) 37.7 2.0 18.9
CNOOC 240,944 121,128 384,264 37,995 (60,426) 12.6 0.3 71.0
CNPC 2,381,278 353,857 3,027,876 544,602 (451,196) 24.3 1.5 23.8
China Oilfield 18,539 8,128 64,851 28,110 (4,596) 49.7 3.5 14.6
CR Gas** 13,507 2,143 25,406 6,500 (2,387) 44.5 3.0 28.9
Beijing Enterprises** 30,472 3,884 77,355 20,248 (7,948) 35.0 5.2 6.0
Sinochem** 412,671 7,516 203,841 63,369 (29,442) 47.3 8.4 3.0
China Merchants Holdings** 9,470 6,469 87,086 24,726 (2,383) 31.1 3.8 5.6
China Overseas Land** 48,583 18,819 175,975 42,624 (1,601) 37.2 2.3 12.8
CR Power** 60,709 12,564 168,366 82,987 (20,688) 59.4 6.8 3.4
CR Land** 35,795 10,850 180,586 60,725 (3,102) 47.8 5.6 6.2
Shenzhen International** 5,581 3,446 39,901 16,734 (2,463) 48.0 4.9 4.0
Yanzhou Coal 47,066 15,205 97,152 34,458 (18,832) 44.3 2.3 18.1
China Metal 243,166 12,993 360,199 148,362 (10,731) 71.0 11.4 1.6
CITIC Pacific** 100,086 8,461 229,739 98,707 (17,978) 54.9 11.7 2.0
Franshion** 6,591 2,705 69,771 25,199 NA 45.2 9.3 3.2
H1-2012
Sinopec 1,252,805 73,938 1,168,178 278,022 (77,126) 34.9 1.9 13.4
CNOOC 118,268 59,680 414,221 54,990 (30,011) 16.2 0.5 70.2
CNPC 1,046,661 165,437 2,051,494 435,103 (127,223) 27.8 1.3 19.3
China Oilfield 10,026 4,640 65,979 28,140 (1,390) 48.3 3.0 15.4
CR Gas** 7,851 1,364 33,646 12,535 (1,090) 52.1 4.6 12.5
Beijing Enterprises** 18,155 2,584 86,262 25,692 NA 35.5 5.0 5.1
Sinochem** 198,863 4,847 209,066 68,157 (1,998) 47.6 7.0 3.5
China Merchants Holdings** 4,793 3,371 94,031 27,538 (1,209) 33.2 4.1 4.9
China Overseas Land** 25,282 9,421 196,292 51,690 NA 39.8 2.6 10.6
CR Power** 30,945 7,595 171,120 88,362 (6,091) 59.2 5.8 3.6
CR Land** 7,919 2,657 206,054 65,705 (1,434) 48.7 5.9 2.0
Shenzhen International** 2,857 1,819 41,308 18,179 (619) 49.7 5.0 3.7
Yanzhou Coal 28,286 5,814 119,242 38,576 (3,045) 44.8 3.3 7.5
China Metal 106,845 5,178 348,172 143,481 (2,579) 74.9 13.9 1.1
CITIC Pacific** 49,919 3,758 246,321 112,436 (10,926) 55.4 14.7 1.6
Franshion** 3,618 1,655 76,914 26,915 NA 45.8 7.6 3.4
Note: H1-2012 data for Sinopec pertains to Sinopec Corp., CNPC pertains to PetroChina and China Metal pertains to MCC; **data in HKD; Sources: Respective companies, S&P, Bloomberg, Standard Chartered Research
GR13JA | 14 January 2013 15
Credit Alert
Figure 16: Bond details and change of control (CoC) clauses
Issuer Guarantor Details
CoC put at 101% if (a) the guarantor ceases to own 100% of the Sinopec Group Overseas Sinopec issuer OR the central government ceases to own 100% of the Sinopec Development (2012) Limited (ONSHORE) guarantor AND (b) credit ratings by two agencies decline below (OFFSHORE) investment grade. CNOOC Finance (2002/2003/2011/2012) CNOOC CNOOC No CoC clause in the bonds. Limited (OFFSHORE) (OFFSHORE) The bonds have two keep-well agreements between the CNPC General Capital guarantor and two onshore entities – CNPC and CPF. CNPC Finance (HK) Ltd./CNPC (HK) Overseas CoC put at 101% if (a) CNPC ceases to own 50.1% of CPF OR CNPC Limited Capital Ltd. CPF ceases to own 100% of the guarantor OR the central (OFFSHORE) (OFFSHORE) government ceases to own 50.1% of CNPC or the guarantor AND (b) credit ratings by two agencies decline below investment grade. CoC put at 101% if (a) the guarantor ceases to own 100% of the COSL Finance (BVI) Ltd. China Oilfield issuer OR CNOOC Corp. ceases to own 40% of the guarantor OR China Oilfield (OFFSHORE) (ONSHORE) the central government ceases to control CNOOC Corp. AND (b) credit ratings by two agencies decline below investment grade. CoC put at 101% if CRH ceases to own 50% of the issuer OR if CR Gas CR Gas CR Gas the issuer merges or sells substantially all its assets to someone (OFFSHORE) (OFFSHORE) other than CRH. CoC put at 101% if (a) Beijing SASAC ceases to own 50.1% of Mega Advance Investments the guarantor OR if a third party gains control of the guarantor OR Ltd./Talent Yield Investments Beijing Enterprises Beijing Enterprises if the guarantor merges with or sells substantially all its assets to Ltd. (OFFSHORE) a third party AND (b) credit ratings by two agencies decline below (OFFSHORE) investment grade. CoC put at 101% if (a) the central government ceases to own Sinochem Overseas Sinochem HK (Group) 50.1% of the guarantor OR if Sinochem Corp. ceases to own Sinochem Capital Co. Ltd. Co. Ltd. 100% of the guarantor AND (b) credit ratings by two agencies (OFFSHORE) (OFFSHORE) decline below investment grade. CoC put at 101% if (a) China Merchants Group ceases to own China Merchants Finance China Merchants China Merchants 50% of the guarantor OR the guarantor merges with or sells Company Ltd. Holdings Holdings substantially all its assets to a third party AND (b) credit ratings by (OFFSHORE) (OFFSHORE) either S&P or Moody's decline below investment grade. China Overseas Finance CoC put at 100% if a third party acquires control (more than 50% China Overseas Land China Overseas Land* (Cayman) N Ltd. of voting rights) of the guarantor OR the guarantor merges with or (OFFSHORE) (OFFSHORE) sells substantially all its assets to a third party. CoC put at 101% if (a) a third party acquires control (more than 50% of voting rights) of the guarantor OR the guarantor merges CR Power CR Power CR Power with or sells substantially all its assets to a third party AND (b) (OFFSHORE) (OFFSHORE) credit ratings by both S&P and Moody's decline below investment grade or are withdrawn. CoC put at 101% if CRH ceases to own at least 50% of voting CR Land CR Land CR Land rights of the issuer OR if the issuer merges or sells substantially (OFFSHORE) (OFFSHORE) all its assets to someone other than CRH. CoC put at 101% if Shenzhen SASAC ceases to own at least Shenzhen International Shenzhen International 30% of voting rights of the issuer OR if a third party owns more Shenzhen International (OFFSHORE) (OFFSHORE) voting rights than Shenzhen SASAC in the issuer OR if the issuer merges or sells substantially all its assets to a third party. CoC put at 101% if (a) the guarantor ceases to own 100% of the Yancoal Intl. Resources Yanzhou Coal issuer OR the government ceases to own 50.1% of the guarantor Yanzhou Coal Development Co. Ltd. (ONSHORE) AND (b) credit ratings by two agencies decline below investment (OFFSHORE) grade.
MCC Holding (HK) Corp. Ltd. China Metal CoC put at 101% if the government ceases to own or control China Metal (OFFSHORE) (ONSHORE) 100% of the guarantor.
CITIC Pacific CITIC Pacific CITIC Pacific No CoC clause in the bonds. (OFFSHORE) (OFFSHORE)
CoC put at 101% if (a) the government ceases to own 50.1% of Sinochem Group OR Sinochem Group ceases to own 50.1% of Franshion Development Ltd. Franshion the guarantor OR the guarantor merges with or sells substantially Franshion (OFFSHORE) (OFFSHORE) all its assets to a third party AND (b) credit ratings of the guarantor by two agencies decline below investment grade. Also the bonds have a „Letter of Support‟ from Sinochem Corp.
Source: Standard Chartered Research
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Credit Alert
Figure 17: Issuance expectations for 2013 Expected issuance Comments (USD mn) Sinopec 2,000 Large overseas investments will be partly funded through the USD bond market.
CNOOC 4,000 Nexen acquisition could lead to USD 4bn of issuance.
CNPC 1,000 Large overseas investments will be partly funded through the USD bond market.
China Oilfield 500 Planned expansion of its rig fleet could lead to USD issuance.
CR Gas 500 Large capex plans could lead to issuance.
Beijing Enterprises 750 Large capex plans could lead to issuance.
Sinochem 1,000 Continuing expansion in oil and gas could lead to issuance in 2013. China Merchants 0 Expansion plans are likely to be domestically funded. Holdings China Overseas Land 0 Unlikely to issue, as it issued USD 1.75bn in 2012.
CR Power 0 Slowdown in capex plans and limited rating headroom will limit debt-raising plans.
CR Land 1,000 Might opportunistically issue if markets remain benign. Shenzhen 500 Expansion of logistics business could lead to USD 500mn of issuance in 2013. International Yanzhou Coal 750 Large capex plan and refinancing needs could lead to issuance.
China Metal 0 Unlikely to issue in the USD market given the rating overhang.
CITIC Pacific 500 Further increase in Sino Iron project capex could lead to USD bond issuance.
Franshion 0 Issued USD 500mn of 2017 bonds in Oct-12. Large cross-border acquisitions and significant investment plans will lead to USD Others 4,000-5,000 issuance from new credits.
Source: Standard Chartered Research
GR13JA | 14 January 2013 17
Credit Alert
China Petrochemical Corp. (Sinopec)
Bharat Shettigar, +65 6596 8251 Sinopec is an integrated energy company with dominant positions across upstream [email protected] and downstream sectors in China. It boasts China‟s second-largest oil and gas reserves and production. It has the largest refinery capacity in Asia and accounts for c.60% of China‟s refined oil supply. It also owns over 30,000 retail stations and has an ethylene production capacity of 10mtpa. It has now diversified into 40 countries, including Brazil, Angola, Russia, Argentina, and Canada. Its main operating arm is 76.3%-owned China Petroleum & Chemical Corporation (Sinopec Corp.), which accounted for 58% of Sinopec‟s assets and 90% of revenue in 2011. Sinopec is 100% owned by the government through SASAC.
Credit outlook – Stable Sinopec‟s large integrated operations generate strong cash flow, and its dominance across energy segments has given it high strategic importance. Fuel-price controls have hit Sinopec‟s refining earnings in the past, although fuel prices were adjusted more frequently in 2012. Sinopec aims to balance its upstream and downstream portfolios and is investing significantly in E&P assets, which carry large execution risk. That said, despite high investment in the past few years, its balance-sheet structure has largely been steady. While we expect leverage to worsen somewhat in 2012-13, Sinopec is unlikely to face the risk of a rating downgrade.
Figure 18: Company structure
SASAC (PRC)
100%
USD Notes Guarantee China Petrochemical Corporation (PRC)
100%
Sinopec Group Overseas Development Limited
100%
Sinopec Group Overseas Development (2012) Limited (British Virgin Islands)
Inter-company Loan
E&P, refining, chemicals, marketing and distribution, oil and petrochemical engineering technical services and others Subsidiaries (outside the PRC)
Subsidiaries (in the PRC)
Domestic oil and gas E&P, refining, marketing and distribution 76.3% Sinopec Corp. (PRC) of refined oil products and the production and sale of (58% of assets; 90% of revenue) petrochemical products
Sources: Company reports, Standard Chartered Research
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Credit Alert
Key credit considerations Moderate profile in upstream operations: Sinopec is one of three wholly government-owned oil and gas companies in China. Given its large, integrated operations with diverse revenue streams, the company is able to mitigate some of the cyclical risks in the industry. That said, Sinopec‟s proven reserves of 5.8bn boe and its 2011 production of 1.55mmboed are much smaller than global oil and gas majors‟. Its domestic reserves have been stagnant at c.3.8bn boe in the past few years, and reserve growth has come mostly from overseas expansion. Also, its three- year average F&D cost is high at USD 31.8/boe, due to higher re-investment and execution risks in overseas fields and maturing domestic assets. Higher risk profile in downstream operations: Sinopec‟s business profile is skewed towards the downstream sector. Its refineries enjoy economies of scale (average capacity of 150kboed), are able to take in a wide mix of crude slates, and are located in China‟s more developed coastal regions (which lowers transportation costs). However, its crude oil self-sufficiency is only c.26%, and the government controls retail fuel prices in China. The timing and extent of refined product price adjustments did not match the spike in crude oil prices in 2008 and 2011, and the segment posted large EBIT losses. The government adjusted product prices seven times in 2012 due to easing inflation; Sinopec‟s refinery segment posted an EBIT profit in Q3-2012 (versus a loss in H1). Separately, the petrochemical operations provide good synergies and accounted for 22% of EBIT in 2011. Strategic importance and government support: Sinopec accounts for 60% of China‟s refined oil supply, 70% of its crude oil imports and 60% of its ethylene production. Separately, it ranks first in terms of revenue among the central SOEs supervised by SASAC, and its tax payments accounted for 3.2% of China‟s fiscal income in 2011. Given its high strategic importance, Sinopec received CNY 50bn of subsidies to compensate for its refining segment‟s losses in 2008. It has also received continued equity injections from the government (15% of current equity was injected over 2007-11) and diplomatic support for its overseas acquisitions. Aggressive investment appetite: Sinopec is strategically focused on the E&P sector to balance its upstream and downstream portfolios. Given limited potential for reserve growth in China, it has increased its reserves through overseas acquisitions. During 2008-11, c.61% of its CNY 693bn investment was in the E&P segment, and it has spent over USD 10bn annually on upstream acquisitions. Hence, in 2011, its overseas assets accounted for 32% of reserves and 30.4% of production (2007: 14.6% and 12.6%, respectively). Since Sinopec has predominantly been an onshore operator, it will likely face significant execution risks as it diversifies into offshore and unconventional international projects. Moderate financial profile: Sinopec‟s financial profile is tempered by the poor profitability of its refining operations, and its metrics are therefore weaker than CNOOC‟s and CNPC‟s. It spent an average of CNY 240-250bn on capex and acquisitions in 2010-11, funded largely through internal cash flow and capital injections. While debt increased by CNY 107bn in 2010-11, debt/capital has been stable at c.38% since 2009. We expect 2013 spending to increase to around CNY 250-300bn, and if the government allows adequate fuel-price changes, a large part of this can be funded through operational cash flow. The company‟s financial policy is to maintain debt/capital under 40% and debt/EBTIDA under 2x. However, leverage could overshoot slightly to 2.2-2.5x in 2012-13. Sinopec‟s liquidity profile is strong, with a cash balance of CNY 77.3bn and undrawn bank facilities of CNY 170.5bn as of end-2011. Only 30% of its debt is due within a year.
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Credit Alert
Figure 19: Oil and gas reserves (bn boe) Figure 20: Oil and gas production (kboed) 6 1,600 1,400 5 Natural gas 1,200 Natural gas 4 1,000 3 800 600 2 Crude oil Crude oil 400 1 200 0 0 2009 2010 2011 2009 2010 2011 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 21: Refinery operations (mt – LHS, % – RHS) Figure 22: Operating profit breakdown (CNY bn)
300 Utilisation 90 160 Technical services (RHS) 140 Marketing & 250 Capacity Others dist. 80 120 200 Throughput 100 Chemicals 80 150 70 60 40 E&P 100 20 60 50 0 -20 Refining 0 50 -40 2009 2010 2011 2009 2010 2011 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 23: Sinopec’s summary financials 2009 2010 2011 2011* H1-12* Income statement (HKD mn) Revenue 1,392.0 1,969.0 2,552.0 2,463.8 1,252.8 EBITDA 170.5 211.1 222.0 171.0 73.9 Gross interest expense (9.6) (9.6) (11.8) (8.5) (5.5) Profit before tax 81.4 105.7 120.1 104.6 34.3 Net income 39.2 52.1 61.1 73.2 23.7 Balance sheet (HKD mn) Cash and equivalents* 30.8 35.4 77.3 24.6 14.0 Total assets 1,291.3 1,485.7 1,745.3 1,144.5 1,168.2 Total debt 329.5 383.8 436.9 240.6 278.0 Net debt 298.7 348.4 359.7 215.9 264.1 Shareholders‟ equity 545.2 629.1 722.3 507.3 519.2 Cash flow (HKD mn) Net operating cash flow 161.7 193.2 202.7 148.3 24.2 Capital expenditure (205.2) (251.7) (243.8) (135.5) (77.1) Free cash flow (43.5) (58.5) (41.0) 12.8 (53.0) Dividends (16.3) (17.9) (22.8) (19.5) (25.5) Key ratios EBITDA growth (%) NA 23.8 5.2 (4.0) (16.5) EBITDA margin (%) 12.3 10.7 8.7 6.9 5.9 Operating ROCE (%) NA 13.1 11.3 15.2 9.9 Total debt/capital (%) 37.7 37.9 37.7 32.2 34.9 Total debt/EBITDA (x) 1.9 1.8 2.0 1.4 1.9 Net debt/EBITDA (x) 1.8 1.7 1.6 1.3 1.8 RCF/debt (%) 43.5 46.3 42.3 62.9 NA EBITDA/interest (x) 17.7 22.0 18.9 20.1 13.4
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 20
Credit Alert
CNOOC Ltd.
Bharat Shettigar, +65 6596 8251 CNOOC Ltd. (CNOOC) is an E&P company in China and the designated operator of [email protected] the country‟s offshore oil and gas assets. It enters into production-sharing contracts (PSCs) with foreign players or undertakes independent E&P activities offshore China. Over the years, it has expanded into Indonesia, Australia, Nigeria, Argentina, Canada and other countries; overseas reserves made up 28.7% of its reserve base of 3,190mmboe as of December 2011. After exhibiting strong growth during 2005-10, CNOOC‟s output volumes have stagnated, and stood at 248.7mmboe in 9M-2012. CNOOC was incorporated in Hong Kong in 1999. It is 64.45% owned by CNOOC Corp., which is in turn 100% owned by China‟s State Council.
Credit outlook – Stable We maintain our Stable credit outlook on CNOOC. The company has a strong operating profile due to its competitive cost structure and long reserve life, and it benefits from a supportive regulatory regime. Looking ahead, given that 55% of its reserves are undeveloped, organic capex will remain high. CNOOC will also seek acquisition opportunities in order to maintain a high production growth rate. While the company has a conservative financial profile (net cash position since 2001), its metrics will weaken due to the Nexen acquisition. Hence, despite the supportive factors of sovereign ownership and strategic importance, we believe the company has limited rating headroom for any further large debt-funded acquisitions.
Figure 24: Company structure
SASAC (PRC) 100% Refinery, petrochemical, oil China National Offshore Oil Corporation (PRC) services and other downstream 100% operations Overseas Oil & Gas Corporation Ltd. (Bermuda)
100%
Public shareholders CNOOC (BVI) Limited and (British Virgin Islands) corporate investors
64.45%
35.55% CNOOC Limited USD Notes Guarantee (Hong Kong)
100%
PRC oil E&P Sales and marketing Overseas interest in businesses, operations activities in CNOOC Finance oil E&P business and properties international markets (2002/2003/2011/2012) Limited (British Virgin Islands)
100% 100% 100%
China Offshore Oil CNOOC CNOOC China Limited (Singapore) International Limited (PRC) International Pte Ltd. (British Virgin Islands) (Singapore)
Sources: Company reports, Standard Chartered Research
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Credit Alert
Key credit considerations Strong operating profile: CNOOC‟s reserve base of 3,190mmboe and reserve life of 9.3 years is comparable to those of large independent E&P companies globally. Its reserve base is now more diversified: 28.7% is located overseas (production share of 21.3% in 2011) and 32% is in the form of natural gas. CNOOC‟s cost structure benefits from low labour costs, predominantly shallow waters offshore China, and favourable PSC arrangements. While all-in production costs have been rising (USD 34.6/bbl in H1-2012 versus USD 22.2/bbl in 2009), they still compare favourably with standalone E&P players‟. That said, we expect these costs to increase due to the company‟s focus on unconventional reserves and deepwater exploration. Also, CNOOC faced an oil spill at platform B and C of Penglai 19-3 field in 2011 (with production levels of 62kboed). As a result, CNOOC‟s output levels have stagnated – its 2012 production target of 330-340mmboe was broadly similar to its 2010 output level. Supportive regulatory regime: CNOOC has the exclusive right to enter into PSCs with foreign partners offshore China and has the right (through its parent) to acquire a stake of up to 51% in any block where petroleum has been discovered by the foreign partner. That said, the government imposed a special oil levy in 2006, and CNOOC‟s outlay on this represented 30.2% of its pre-tax profit in H1-2012. Large investment appetite: CNOOC has a good track record of growing its reserves thanks to its experience offshore China. That said, around 55% of its reserves are undeveloped, and it plans to further diversify geographically and maintain a reserve replacement ratio of more than 100% (147% over the past three years), which indicates the need for large development expenditure. Separately, it has undertaken a series of acquisitions – in 2011, it acquired 33.3% in Chesapeake‟s Niobrara shale gas project for USD 570mn, 33.3% in Tullow Oil‟s three projects in Uganda for USD 1.47bn, and 100% of OPTI Canada for USD 2.1bn. In 2012, it announced an agreement to acquire Canada-based Nexen Inc. for a cash consideration of USD 15.1bn. The deal will meaningfully increase CNOOC‟s production (20%), reserve size (30%) and diversification. We expect CNOOC to maintain its acquisition appetite, especially for unconventional assets. Financial profile will weaken gradually: CNOOC has consistently posted annual free cash flow and has maintained a net cash position since 2001. However, in H1- 2012, EBITDA declined 7.8% y/y due to lower production and higher operating costs. Investment spending has risen in recent years (CNY 60.4bn in 2011 from CNY 26.9bn in 2007), and in 2012, organic capex was budgeted at USD 9.3-11bn (versus USD 6.4bn in 2011). While CNOOC‟s financial metrics were comfortable as of June 2012, the Nexen acquisition will lead to a moderation in these ratios; we expect debt/capital to increase to 26% from 16.2% and leverage to increase to 0.7-08x from 0.5x. Looking ahead, capex plans are sizeable (including costly deepwater spending), and we expect 2013 investments to be in the USD 8-10bn range. With 2013 EBITDA expected to be around CNY 120-125bn, CNOOC should be able to fund its development capex with operating cash flow. That said, while rating agencies affirmed the ratings following the proposed acquisition of Nexen, CNOOC has limited rating headroom for any further substantial debt-funded acquisitions. Sovereign linkage: CNOOC is strategically important to China given its role in developing offshore oil and gas reserves, and it will likely be used as a vehicle to support China‟s long-term energy-security goals. Hence, its overall credit profile benefits from a high likelihood of support from its parent, CNOOC Corp., and ultimately the government.
GR13JA | 14 January 2013 22
Credit Alert
Figure 25: Average production levels (kboed) Figure 26: Total production costs (USD per boe) 1,000 40 35 800 30
600 25 Gas 20 400 15 10 200 Oil 5 0 0 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 27: Capex breakdown (USD bn) Figure 28: Debt and cash levels (CNY bn) 8 Exploration Development Production Others 120
100 6 80 Cash and 4 60 equiv.
40 2 20 Debt
0 0 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 29: Summary financials 2008 2009 2010 2011 H1-12 Income statement (CNY mn) Revenue 125,977 105,195 180,036 240,944 118,268 EBITDA 63,923 56,267 97,901 121,128 59,680 Gross interest expense (415) (535) (1,122) (1,707) (850) Profit before tax 57,880 40,821 72,603 92,565 45,209 Net income 44,375 29,486 54,410 70,255 31,869 Balance sheet (CNY mn) Cash and equivalents 52,722 52,067 58,203 75,730 113,903 Total assets 206,669 242,268 318,430 384,264 414,221 Total debt 13,881 18,692 31,053 37,995 54,990 Net debt (38,842) (33,375) (27,150) (37,735) (58,913) Shareholders‟ equity 160,238 173,936 215,766 262,856 284,225 Cash flow (CNY mn) Net operating cash flow 53,662 49,006 74,338 88,199 26,240 Capex and investments (37,414) (43,627) (60,899) (60,426) (30,011) Free cash flow 16,248 5,379 13,439 27,773 (3,771) Dividends (14,652) (14,175) (14,390) (20,877) NA Key ratios EBITDA growth (%) 31.6 (12.0) 74.0 23.7 (7.8) EBITDA margin (%) 50.7 53.5 54.4 50.3 50.5 Operating ROCE (%) 33.7 22.0 32.4 33.1 27.8 Total debt/capital (%) 8.0 9.7 12.6 12.6 16.2 Total debt/EBITDA (x) 0.2 0.3 0.3 0.3 0.5 Net debt/EBITDA (x) NM NM NM NM NM RCF/debt (%) 275.8 162.9 212.6 208.6 NA EBITDA/interest (x) 153.9 105.3 87.3 71.0 70.2
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 23
Credit Alert
China National Petroleum Corp. Bharat Shettigar, +65 6596 8251 China National Petroleum Corp. (CNPC) is China‟s largest oil and gas company in [email protected] terms of reserves (23.2bn boe) and production (4.4mmboed). It also has large downstream operations in refining (total capacity of 219.4mtpa), chemicals (production of 40.9mtpa) and product trading. Separately, it is China‟s largest natural gas transporter and dominates the natural gas, crude oil and refined product pipeline segments. Its main operating arm is the 86.5%-owned PetroChina Co. Ltd. (PetroChina), which accounted for 63.4% of CNPC‟s assets and 84% of revenue in 2011. CNPC is 100% owned by the government through SASAC.
Credit outlook – Stable CNPC‟s large and highly profitable upstream operations support the company‟s excellent business risk profile, and its dominance across China‟s entire oil and gas value chain leads to very high strategic importance. That said, CNPC‟s downstream operations face profitability pressure on account of government control of refined product and natural gas prices. Also, its solid financial metrics will deteriorate gradually as the company undertakes large capex and aggressive overseas expansion. We expect debt/capital to rise from 24% to 30-35% in the next couple of years, although this is unlikely to put pressure on CNPC‟s ratings. We therefore maintain our Stable outlook on the credit.
Figure 30: Company structure
SASAC (PRC)
100%
CNPC (PRC) 86.5%
PetroChina (PRC) 51% CNPC keep-well agreement
49% China Petroleum Finance (PRC)
Oil and gas, 100% CPF keep-well agreement oilfield and engineering services and others CNPC Finance (HK) Limited (Hong Kong)
USD Notes Guarantee 100%
CNPC (HK) Overseas Capital Ltd./CNPC General Capital Ltd. (British Virgin Islands)
Inter-company loan Inter-company loan guarantee
Subsidiaries (outside the PRC)
Subsidiaries (PRC)
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 24
Credit Alert
Key credit considerations Excellent E&P operations: E&P is CNPC‟s most important business, accounting for 39.7% of assets, 52.1% of capex and most of its pre-tax profit in 2011. CNPC is among the world‟s top five integrated oil and gas companies. While it has historically concentrated on China, it has now expanded to 29 countries, and 21% of its production came from overseas fields in 2011. It has also diversified its reserve base, and natural gas accounts for 48.5% of its reserve portfolio. Its three-year average reserve replacement rate is high at 127%, and its reserve life is moderate at 15 years. PetroChina‟s three-year finding and development cost is low, at USD 13.5/boe (although it is rising due to maturing oil fields and overseas expansion). The earnings potential of the E&P segment is constrained by the special levy on crude oil (which accounted for 11.5% of E&P revenue in 2011). Higher risk profile in downstream operations: CNPC has an integrated downstream franchise, including China's second-largest refining capacity and its largest natural gas/oil pipeline network and petrochemical operations. CNPC‟s crude oil self-sufficiency ratio is c.100%, providing a good hedge against oil prices, while the refinery utilisation rate is high (87.5% in 2011). However, the government controls fuel prices, and CNPC is unable to pass on higher oil prices to consumers. Hence, in 2011, the refining and chemicals segment incurred a loss of CNY 63bn. In the gas pipeline business, while the fixed transmission tariff leads to strong cash flow, wholesale tariffs are determined by the government, and CNPC suffers losses on sales of imported gas (20% of its volumes). In 2011, pre-tax profit of the natural gas pipeline segment declined 57% y/y to CNY 6.8bn. Strategic importance: Of the entities owned by SASAC, CNPC is the largest in terms of assets and the second largest in terms of revenue. CNPC accounts for 70% of China‟s petroleum reserves and 60% of its oil and gas production, and is the largest importer of crude oil and refined products. Given its dominance in the oil and gas sector, CNPC‟s strategic importance is very high. Government support: The government's diplomatic efforts give CNPC easier access to politically riskier countries in West Africa and the Middle East. In 2008, the government provided CNY 20bn of subsidies for losses in the refining segment. Separately, in early 2012, the government raised the threshold of its special oil gain levy to USD 55/bbl from USD 40/bbl, which helped offset the impact from the change in resource tax calculation introduced in September 2011. Given the social and political ramifications, we see a near-certain likelihood of government support in case CNPC faces financial difficulties. Strong financial profile: In 2011, CNPC‟s EBITDA increased 8.4% to CNY 354bn although EBITDA margins declined by 410bps to 14.9% on account of the reasons mentioned above. Historically, CNPC‟s financial management has been conservative, and it enjoyed an excellent financial profile with a net cash position until 2008. However, large capex and investment spending led to average annual negative FCF after acquisitions of CNY 239bn in 2009-11. Hence, debt/capital rose to 24.3% in 2011 from 8.8% in 2008, while debt/EBITDA is now at 1.5x. Ambitious overseas expansion and acquisition plans (with a target of increasing reserves to 26bn boe by 2013) will require investment spending of c.CNY 400-450bn in 2013-14. We expect the company to continue to post negative FCF in the next few years and debt/capital to rise to 30-35%. However, the rating agencies have emphasised CNPC‟s strategic importance and strong government links as key rating drivers, and we do not see any downgrade pressures. CNPC enjoys a solid liquidity profile, with a CNY 281bn cash balance as of December 2011 and strong access to banks and capital markets.
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Credit Alert
Figure 31: Oil and gas reserves (bn boe) Figure 32: Oil and gas production (mmboed) 25 Crude oil Natural gas 5.0 Crude oil Natural gas
20 4.0
15 3.0
10 2.0
5 1.0
0 0.0 2007 2008 2009 2010 2011 2008 2009 2010 2011 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 33: Capex breakdown (CNY bn) Figure 34: Pre-tax profit breakdown (CNY bn) E&P Refining and chemicals Marketing Natural gas & pipelines Others E&P Refining and chemicals
400 400 Marketing Trading 300 300 Thousands 200
200 100
0 100 -100
0 -200 2008 2009 2010 2011 2008 2009 2010 2011 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 35: Summary financials 2009 2010 2011 2011* H1-12* Income statement (CNY mn) Revenue 1,220.5 1,720.9 2,381.3 2,003.8 1,046.7 EBITDA 256.5 326.4 353.9 323.4 165.4 Gross interest expense (6.8) (9.4) (14.8) (7.6) (8.6) Profit before tax 128.4 172.7 181.7 184.2 87.6 Net income 69.6 97.3 105.5 133.0 62.0 Balance sheet (CNY mn) Cash and equivalents 258.5 237.1 281.5 61.2 73.4 Total assets 2,221.6 2,630.0 3,027.9 1,917.6 2,051.5 Total debt 281.7 456.2 544.6 318.0 435.1 Net debt 23.2 219.1 263.1 256.8 361.8 Shareholders‟ equity 1,421.2 1,568.1 1,700.7 1,082.5 1,131.1 Cash flow (CNY mn) Net operating cash flow 188.4 269.8 293.4 288.7 42.8 Capex and investments (474.6) (542.3) (451.2) (268.1) (127.2) Free cash flow (286.2) (272.5) (157.8) 20.7 (84.4) Dividends (21.0) (23.6) (38.8) (63.3) 0.0 Key ratios EBITDA growth (%) (0.8) 27.2 8.4 6.5 4.1 EBITDA margin (%) 21.0 19.0 14.9 16.1 15.8 Operating ROCE (%) 8.6 9.9 8.8 14.0 12.3 Total debt/capital (%) 16.5 22.5 24.3 22.7 27.8 Total debt/EBITDA (x) 1.1 1.4 1.5 1.0 1.3 Net debt/EBITDA (x) 0.1 0.7 0.7 0.8 1.1 RCF/debt (%) 73.2 58.0 51.2 90.4 NA EBITDA/interest (x) 37.5 34.8 23.8 42.5 19.3
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 26
Credit Alert
China Oilfield Services Ltd.
Bharat Shettigar, +65 6596 8251 China Oilfield Services Ltd. (COSL) was established in 2001 following the merger of [email protected] CNOOC Group‟s seven oilfield services subsidiaries. COSL was listed on the HKSE in 2002 and on the SSE in 2007. CNOOC Group holds a 53.63% stake in the company. COSL is currently the largest oilfield services provider in China. Its operations include drilling (fleet of 27 jack-up rigs and seven semi-submersible rigs, two accommodation rigs and four module rigs), well services (such as logging, drilling fluids, directional drilling, and cementing), marine transport and support (the largest fleet in offshore China with 73 support vessels), and geophysical services (seven seismic vessels and seven surveying vessels).
Credit outlook – Stable We have a Stable credit outlook on COSL. The company dominates offshore drilling in China and, given captive demand from CNOOC Group, it enjoys high utilisation rates and steady margins. That said, its deepwater E&P capabilities lag global peers‟, and this could pose a challenge in the long run. Also, while we expect earnings growth of 10-12% in 2013, capital spending is likely to rise significantly as it expands its rig fleet and invests in other assets. Hence, leverage will likely increase to around 4x. However, barring a large acquisition, we do not see ratings pressure emerging given COSL‟s strong business linkage to and parental support from CNOOC Group.
Figure 36: Company structure
SASAC (PRC) 100%
CNOOC Corp. (PRC)
64.45% 53.63%
CNOOC Ltd. China Oilfield COSL Chemicals (Tianjin) Ltd. (Hong Kong) (PRC) (PRC)
USD Notes Guarantee 100.0%
China Oilfield Services (BVI) Ltd. (British Virgin Island)
100.0% 100.0%
Various subsidiaries Various subsidiaries
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 27
Credit Alert
Key credit considerations Dominance in offshore China: COSL provides most of the oilfield and drilling services for CNOOC Group (CNOOC, which has exclusive rights to conduct E&P operations in offshore China). COSL is the industry leader, with a market share of more than 90% in offshore drilling, cementing, and 2D/3D seismic surveys offshore China. As COSL gets first preference on business from CNOOC, it enjoys high utilisation rates (around 95%) and relatively stable and healthy margins. Given that CNOOC has a reserve life of about nine years, we believe COSL‟s cash-flow generation will be reasonably secure in the medium term. That said, COSL‟s deepwater E&P capabilities lag those of large global players. With CNOOC increasingly looking at deepwater exploration in the South China Sea for reserve replenishment (it has set an ambitious target of doubling its production in less than a decade), we believe COSL will face challenges in servicing CNOOC's requirements in the long run. COSL‟s acquisitions of Awilco (renamed COSL Drilling Europe AS) in 2008 and other investments have improved its technological capabilities in recent years. Growing international business: COSL has a relatively short track record in the international markets. The Awilco acquisition has improved its competitiveness, and it currently offers drilling and oilfield services in the North Sea, the Middle East, Australia and the Gulf of Mexico, and counts majors such as ConocoPhillips, BP, Statoil and Pemex among its customers. In H1-2012, COSL‟s overseas operations recorded 41% y/y revenue growth and accounted for 31.6% of revenue. CNOOC‟s international expansion could potentially lead to new opportunities for COSL. Parental support underpins credit profile: COSL plays an integral role in CNOOC, which has accounted for nearly two-thirds of COSL‟s revenue in the past five years. In terms of tangible support, CNOOC provided a CNY 2bn credit facility to COSL in 2009 and has helped it gain easier access to the domestic bank and bond markets. Also, CNOOC recently developed the HYSY981 (China‟s first ultra-deepwater semi- submersible drilling rig) at a cost of CNY 6bn, and delivered it to COSL for operation under a management contract. We believe COSL is critically important to CNOOC and will likely receive assistance if required. We expect COSL to take a measured approach to international investments, and CNOOC will likely account for more than 60% of COSL‟s overall revenue in the medium term. Credit metrics will moderate in the medium term: COSL‟s excellent balance-sheet structure moderated with the CNY 17.1bn debt-funded acquisition of Awilco in 2008 (debt/capital is now at 48.3%, versus 12.4% in 2007, while debt/EBITDA has risen to 3x from 0.6x). That said, given its largely captive business model, COSL has maintained high utilisation of its rigs in the past five years, and EBITDA margin in the 43-48% range. COSL‟s earnings stability is much better than that of its international peers and acts as a key support factor for its credit profile. We expect COSL‟s EBITDA to grow 10-12% in 2012-13 due to the contribution from the three new semi- submersibles and increased earnings in the well services segment. The company spent c.CNY 4.5bn in annual capex in 2010-11 and had budgeted CNY 4-5bn of capex for 2012, likely met through operational cash flow. However, capital spending will rise significantly starting in 2013, given COSL‟s strategic move to expand its rig fleet and other assets in order to boost its deepwater capabilities and improve its global positioning. We expect COSL‟s debt/EBITDA to increase to around 4x in the next two years. However, barring a large acquisition, we do not see ratings pressure emerging on the credit given its relatively steady earnings generation capability.
GR13JA | 14 January 2013 28
Credit Alert
Figure 37: Revenue breakdown (CNY bn) Figure 38: EBIT breakdown (CNY bn) 20 Drilling Well services MS&T Geophysical 6 Drilling Well services MS&T Geophysical
5 15 4
10 3
2 5 1
0 0 2008 2009 2010 2011 H1-12 2008 2009 2010 2011 H1-12 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 39: Average day rates (USD ’000 per day) Figure 40: Capex breakdown (CNY bn) 35 10 Drilling Well services MS&T Geophysical
30 Semi- submersible 8 25
20 6 Accomodation rigs 15 4 10 Jack-up 2 5
0 0 2009 2010 2011 H1-12 2008 2009 2010 2011 H1-12
Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 41: Summary financials 2008 2009 2010 2011 H1-12 Income statement (CNY mn) Revenue 12,192 17,974 17,650 18,539 10,026 EBITDA 5,194 8,153 8,495 8,128 4,640 Gross interest expense (639) (786) (674) (470) (229) Profit before tax 3,307 3,760 4,834 4,812 2,889 Net income 3,102 3,135 4,128 4,039 2,403 Balance sheet (CNY mn) Cash and equivalents 4,564 4,015 6,335 6,539 7,539 Total assets 56,201 60,777 63,497 64,851 65,979 Total debt 28,529 31,104 29,815 28,110 28,140 Net debt 23,965 27,090 23,480 21,571 20,602 Shareholders‟ equity 19,798 22,306 25,590 28,459 30,082 Cash flow (CNY mn) Net operating cash flow 3,551 4,220 7,074 5,832 3,098 Capex and investments (23,278) (7,399) (4,434) (4,596) (1,390) Free cash flow (19,726) (3,179) 2,640 1,236 1,709 Dividends (539) (629) (630) (805) (811) Key ratios EBITDA growth (%) 34.2 57.0 4.2 (4.3) 10.7 EBITDA margin (%) 42.6 45.4 48.1 43.8 46.3 Operating ROCE (%) 10.7 10.4 9.9 9.0 10.4 Total debt/capital (%) 59.0 58.2 53.8 49.7 48.3 Total debt/EBITDA (x) 5.5 3.8 3.5 3.5 3.0 Net debt/EBITDA (x) 4.6 3.3 2.8 2.7 2.2 RCF/debt (%) 13.9 14.3 22.0 21.7 16.3 EBITDA/interest (x) 6.6 7.8 11.1 14.6 15.4
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 29
Credit Alert
China Resources Gas Group Ltd. Bharat Shettigar, +65 6596 8251 China Resources Gas Group Ltd. (CR Gas) is involved in the construction and [email protected] operation of piped natural gas distribution facilities in China. As of June 2012, it operated 80 city-gas projects across the country. In H1-2012, its gross gas sales volume was 4.25bn cubic meters (bcm) and it had 11.4mn residential customers. In H1-2012, it generated revenue of HKD 7.85bn, of which 86% was from piped gas sales and 14% from connection fees. CR Gas is headquartered in Hong Kong and Shenzhen and is listed on the HKSE. CR Gas is 68.5% owned by China Resources (Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by China‟s State Council through China Resources National Corporation.
Credit outlook – Stable The company has emerged as one of China‟s largest city-gas distributors and will enjoy high earnings growth in the next few years. While there are tariff risks in residential sales, we do not expect them to have a material impact on CR Gas‟s profitability. Also, CRH‟s incubation strategy has substantially reduced execution risks in 46 of its projects. That said, the company has ambitious growth plans and will likely spend HKD 5-7bn annually on capex and investments over 2013-15. While it has pre-funded part of its debt requirements, we expect a gradual moderation in its excellent financial metrics. However, we do not see a risk of a rating downgrade in 2013.
Figure 42: Company structure
SASAC (PRC) 100% China Resources National Corporation (PRC) 100% China Resources Co. Ltd. (PRC) 100% China Resources (Holdings) Co Ltd. (PRC)
Varied interests 68.5%
CR Power, CR Land, CR Cement, CR Enterprises, etc. China Resources Gas Group Ltd. USD Notes Issuer and (Varying stakes) (Bermuda) Guarantor
100% 100%
Thousand Victory Investments 46 holding companies China Resources Hong Kong/China (British Virgin Islands) (British Virgin Islands and Hong Kong) Investment Ltd. (Hong Kong)
100%
Sale and distribution of piped natural gas, construction and operation of CNG refuelling Flemming Limited stations and other projects
Varied interests
Subsidiaries and associates (PRC)
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 30
Credit Alert
Key credit considerations Strong market position: Within five years, CR Gas has emerged as one of China‟s largest city-gas distributors, with a natural gas market share of c.10%. Given factors such as rapid economic growth and urbanisation, the cost advantages of natural gas over crude oil and supportive government policy, the company posted an EBITDA CAGR of 57% during 2008-11. CR Gas‟ projects are well diversified across the country and include large industrial centres such as Chengdu, Zhengzhou, Suzhou and Wuxi (these four cities accounted for 37% of gas revenue in 2011). Around 70% of its sales are to commercial and industrial (C&I) customers who do not face high tariff risks (see below). Separately, CR Gas has a strategic gas supply collaboration with CNPC, which provided c.68% of its gas requirement in 2011. Regulatory risks: In China, while upstream gas prices and transmission tariffs are controlled by the central government, end-user tariffs are governed by local governments. CR Gas is able to pass on price increases to C&I and vehicular gas customers (with a slight delay), but residential customer tariff revisions require a local hearing and take at least 6-12 months to implement. The last wellhead price increase was in June 2010, and CR Gas was able to pass through the higher costs for c.95% of its gas volumes. Separately, there remains a risk that CR Gas‟ connection fees (which accounted for c.40% of its EBIT in H1-2012) may be reduced or eliminated for some projects in the future. Strong parental support: CR Gas has received strong support from its parent as part of an „incubation strategy‟, under which CRH transfers only profitable projects to CR Gas after a three-to-four-year incubation period. Over 2008-11, CRH transferred 30 projects worth HKD 9.1bn, which were funded predominantly through equity subscription and shareholder loans from the parent. In H2-2012, CRH transferred the final batch of 16 projects to CR Gas for a cash consideration of HKD 2.4bn. Given CRH‟s SOE status, CR Gas has also been able to acquire city-gas projects through negotiated contracts with local governments (avoiding competitive bidding) and has enjoyed access to low-cost bank funding. Ambitious investment plans: CR Gas has ambitious growth plans and has set a target to expand its reach to 20mn households and achieve gas sales of 20bcm by 2015. It expects to spend USD 2bn (HKD 15.5bn) on acquisitions during 2012-15. In 2012, it paid USD 238mn to acquire 100% of AEI China Gas Ltd. (28 projects), HKD 2.4bn for the 16 projects from CRH and HKD 530mn for seven other projects. Separately, CR Gas had budgeted organic capex of c.HKD 1.8bn in 2012, and we expect annual investment spending (including acquisitions) of c.HKD 5-7bn during 2013-15. That said, CR Gas has shown a willingness to raise equity to part-fund its acquisitions; in November 2012, it announced an equity placement of HKD 2.7bn. Financial profile will moderate gradually: In H1-2012, CR Gas posted 42% revenue growth and a 31% EBITDA increase on the back of acquisitions and organic growth. The company pre-funded part of its debt requirements through the USD 750mn bonds; hence, its leverage appeared high at 4.6x as of June 2012. We expect 20-25% EBITDA growth in 2013, although operating cash flow will be inadequate to fund the heavy investments lined up. CR Gas has maintained very healthy financial metrics, with a net cash position since 2010. As of June 2012, it had HKD 14.3bn of cash on its books; we expect it to keep HKD 3-3.5bn for normal operations, and the rest to be spent on acquisitions. Given the large investments, we expect a gradual deterioration in CR Gas‟ financial metrics. That said, with incremental earnings coming in, debt/capital will remain around 50-55%, while debt/EBITDA will be c.3.5x, which is appropriate for its ratings.
GR13JA | 14 January 2013 31
Credit Alert
Figure 43: Project acquisition history (nos.) Figure 44: Revenue split and gross margins (%) Gas sales Connection fee 100 Acquired from CR Holdings Direct acqusition from market 100% 80% 70% 80 80% Connection 60% fee margin 60 60% (RHS) 50% 40% 40 40% Gas sales margin (RHS) 30% 20% 20 20% 10% 0 0% 0% 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 H1-12 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 45: Gross gas sales volume (mcm) Figure 46: Operating data (mn – LHS, 000 m3 – RHS) 8,000 Residential C&I CNG stations Bottled gas 12 25 Number of 10 connected 20 6,000 households 8 15 Daily installed 4,000 6 capacity for C&I customers 10 4 (RHS) 2,000 5 2
0 0 0 2007 2008 2009 2010 2011 H1-12 2007 2008 2009 2010 2011 H1-12 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 47: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 3,367 4,110 9,331 13,507 7,851 EBITDA 554 704 1,637 2,143 1,364 Gross interest expense (29) (33) (55) (74) (109) Profit before tax 409 644 1,367 2,148 1,245 Net income 297 460 787 1,200 752 Balance sheet (HKD mn) Cash and equivalents 1,347 2,672 6,707 6,890 14,324 Total assets 4,527 10,717 20,779 25,406 33,646 Total debt 147 2,731 5,690 6,500 12,535 Net debt (1,199) 60 (1,017) (390) (1,789) Shareholders‟ equity 2,539 3,158 7,984 10,619 11,510 Cash flow (HKD mn) Net operating cash flow 712 969 1,601 2,036 2,860 Capex and investments (4,361) (751) (2,153) (2,387) (1,090) Free cash flow (3,649) 218 (552) (351) 1,771 Dividends (18) (139) (136) (179) (200) Key ratios EBITDA growth (%) (54.9) 27.1 132.4 30.9 31.4 EBITDA margin (%) 16.5 17.1 17.5 15.9 17.4 Operating ROCE (%) 8.7 11.9 12.3 10.8 10.8 Total debt/capital (%) 6.2 53.0 49.4 44.5 52.1 Total debt/EBITDA (x) 0.3 3.9 3.5 3.0 4.6 Net debt/EBITDA (x) NM 0.1 NM NM NM RCF/debt (%) 334.6 18.6 23.3 26.1 NA EBITDA/interest (x) 19.2 21.6 30.0 28.9 12.5
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 32
Credit Alert
Beijing Enterprises Holdings Ltd.
Bharat Shettigar, +65 6596 8251 Beijing Enterprises Holdings Ltd. (BEH), an investment holding company, is the [email protected] Beijing municipal government‟s main listed vehicle for raising capital to fund public utility projects. It was set up and listed in Hong Kong in 1997, and its asset portfolio has changed significantly since then. BEH now focuses on three key businesses: pipeline gas operations (69% of pre-tax profit, conducted through wholly owned Beijing Gas), brewery (31.3%, through 56.5%-owned Yanjing Brewery), and water and sewage treatment (10.5%, through subsidiaries and 44.1%-owned Beijing Enterprises Water). BEH is 59.3% owned (directly and indirectly) by Beijing Enterprises Group, which is in turn 100% owned by the Beijing municipal government and supervised by Beijing SASAC.
Credit outlook – Stable We have a Stable credit outlook on BEH. The company enjoys a de facto monopoly in gas distribution in Beijing. While uncertainty on tariff adjustment poses risks, the company‟s close government links have ensured steady operating margins in this business. The beer business also has a strong market position and is highly cash- generative. The company has a good financial track record, although its leverage has increased due to debt-funded capex, especially in the sewage and water business. With HKD 5-6bn of annual capex and dividend payout ratios of around 30%, we do not expect a material improvement in balance-sheet metrics. That said, barring large acquisitions or asset injections, we expect BEH to remain a high-BBB credit.
Figure 48: Company structure
Beijing SASAC (PRC) 100%
Beijing Enterprise China Communication Group (PRC) Beijing Yan Jing Beer Group Company Group Co. Ltd. (PRC) (PRC) 16.78% 72.72% 10.5% Beijing Enterprises Investment Ltd. (PRC) 40.66% 23.19% Public investors
36.15% Beijing Enterprises Holdings Ltd. 100% Finance subsidiaries (Hong Kong) (British Virgin Islands) USD Notes Guarantee
Sewage and water Expressways and Natural gas Brewing Others treatment toll roads 100% 100.0% 80% 96% 42.87%
Beijing Gas Group Beijing Bei Kong Beijing Capital Beijing (PRC) Water Yanjing Beer (PRC) Expressway Development Production Co. Development (Hong Kong) 40% Ltd. Company Ltd. 56.48% PetroChina 44.11% 29.18% Beijing Pipeline Co. Beijing Yanjjng CIT Beijing Brewery Co. Ltd. Development Enterprises Water (Bermuda)
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 33
Credit Alert
Key credit considerations Gas business: Beijing Gas has a monopoly on gas distribution in Beijing until 2032. China‟s focus on clean energy and the company‟s penetration into suburban markets ensure strong growth potential. In H1-2012, distribution volumes grew 16.2% y/y to 4.01bcm, and Beijing Gas had 4.48mn subscribers. However, it faces regulatory risks given uncertainty surrounding tariff adjustment, especially for the residential segment. While the government has talked about a cost-pass-through mechanism, this is unlikely to be implemented in the near term. That said, Beijing Gas has received support from the municipal government and CNPC to moderate the impact of delayed price adjustments, and has kept its EBIT margin in the 15.6-17.2% range since 2008. Beijing Gas has backward-integrated through a 40% JV with CNPC for the Shaanxi-Beijing transmission pipelines, which provide it low-cost gas supply. The transmission business generates steady cash flow, and BEH‟s share of the segment‟s future capex is limited. Brewery operations: Yanjing Beer operates 39 breweries in 17 provinces, with a capacity of 8.75bn litres. It is China‟s third-largest beer company by sales volume (c.10.8% market share) and is dominant in Beijing, with an 85% market share. The business has posted steady PBT margins in the 8.2-12.4% range since 2008. It targets double-digit volume growth until 2015, although in H1-2012, volumes rose only 2.75% y/y to 2.8bn litres. While Yanjing Beer has large investments lined up, they will be primarily funded internally. That said, large acquisitions need to be monitored (in 2012, the company indicated an interest in buying Kingway Brewery Holdings Ltd. for a reported USD 700mn). Sewage, water treatment and roads: BE Water operates 67 sewage treatment plants and seven water supply plants. Its competitive advantages include government support and advanced technology and expertise. The segment‟s cash flow is a bit volatile, as payments from Beijing Municipal Water Company have not been timely. Also, capex will remain high due to its build-operate-transfer project model, which involves large upfront investments. While BE Water has high leverage due to the early-stage nature of the business, we expect strong cash flow in the next few years (in H1-2012, gross profit increased 39% y/y to HKD 646mn). Leverage will remain high: Given its utility-focused business mix, BEH has maintained a strong financial profile even during the high-growth phase of the past few years (EBITDA rose at a CAGR of 24% over 2006-11). While leverage increased to 5x in H1-2012, the company has historically also maintained large cash balances. In H1-2012, overall debt increased by HKD 5.4bn to HKD 25.7bn, and debt/capital stood at 35.5% as of June 2012. We expect BEH to spend around HKD 5-6bn on capex in 2013, and given its 30%-plus dividend payout policy, we do not expect significant improvement in the balance-sheet structure. Liquidity was solid as of June 2012, with HKD 15.2bn of cash and equivalents, versus ST debt of HKD 5.7bn and capital commitments of HKD 4.4bn. This will improve further given the HKD 1.4bn to be raised from the sale of its stake in BE Motorway. BEH enjoys strong capital- market access and has raised HKD 13.5bn in equity since its listing. Government linkage: The Beijing municipal government restructured BEH during 2005-07 and injected Beijing Gas into BEH while spinning off some non-core assets. This improved its overall business and financial profile. However, the type and quality of further asset injections could pose risks – in September 2011, BEH invested c.HKD 1.5bn and increased its stake in Beijing Development (HK) Ltd., a small real- estate company with a poor financial profile. Also, Beijing Enterprises Group has picked up a 19.5% stake in China Gas Holdings Ltd., and it is unclear whether the stake will be transferred to BEH at a later stage.
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Credit Alert
Figure 49: Gas business (bcm – LHS, mn – RHS) Figure 50: Brewery segment (bn litres – LHS, HKD bn – RHS)
7 5.0 6 16 4.5 6 Subscribers 14 4.0 5 (RHS) Volume 12
5 Thousands Revenue 3.5 4 (RHS) 10 4 Gas volumes 3.0 2.5 3 8 3 2.0 6 2 2 1.5 4 1.0 1 1 0.5 2 0 0.0 0 0 2007 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 51: Revenue breakdown (HKD mn) Figure 52: Pre-tax profit breakdown (HKD mn)
40 Piped gas Brewery 6.0 Piped gas Brewery Sewage & water treatment Expressway & toll road Sewage & water treatment Expressway & toll road
30 4.0
20 2.0
10 0.0
0 -2.0 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012
Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 53: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 19,704 24,208 27,613 30,472 18,155 EBITDA 3,033 3,754 3,914 3,884 2,584 Gross interest expense (407) (364) (375) (647) (507) Profit before tax 3,056 3,605 3,795 4,249 2,497 Net income 2,282 2,399 2,639 2,776 1,819 Balance sheet (HKD mn) Cash and equivalents 6,667 9,486 14,447 12,579 15,221 Total assets 51,697 59,105 67,029 77,355 86,262 Total debt 7,584 11,024 12,491 20,248 25,692 Net debt 917 1,538 (1,956) 7,668 10,471 Shareholders‟ equity 36,311 39,017 40,936 45,197 46,739 Cash flow (HKD mn) Net operating cash flow 1,584 2,730 6,568 (1,573) NA Capex and investments (3,281) (3,047) (5,626) (7,948) NA Free cash flow (1,721) (377) 940 (9,540) NA Dividends (855) (942) (1,263) (1,179) NA Key ratios EBITDA growth (%) 32.8 23.8 4.3 (0.8) 7.4 EBITDA margin (%) 15.4 15.5 14.2 12.7 14.2 Operating ROCE (%) 6.1 7.3 7.3 6.4 10.8 Total debt/capital (%) 20.4 26.0 26.7 35.0 35.5 Total debt/EBITDA (x) 2.5 2.9 3.2 5.2 5.0 Net debt/EBITDA (x) 1.0 0.2 NM 2.5 2.0 RCF/debt (%) 29.6 31.1 31.0 8.7 NA EBITDA/interest (x) 7.5 10.3 10.5 6.0 5.1
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 35
Credit Alert
Sinochem Hong Kong (Group) Co. Ltd.
Bharat Shettigar, +65 6596 8251 Sinochem Hong Kong (Group) Co. Ltd. (Sinochem HK) is an intermediate holding [email protected] company of the Sinochem Group, which is directly owned and supervised by China‟s State Council. It is the group's primary overseas subsidiary and its key platform for conducting international trade, investment and offshore funding. It is 98% owned by Sinochem Group (through Sinochem Corp.) and accounted for 79% of the group‟s assets at end-2011 and 62% of 2011 net income. Sinochem HK is engaged in three primary businesses: fertiliser (14% of revenue, 15% of EBIT in H1-2012), oil and gas (82%, 30%), and real estate (2%, 49%). It owns two listed companies: Sinofert Holdings Ltd. (52.7% stake) and Franshion Properties China Ltd. (62.9% stake).
Credit outlook – Stable Sinochem‟s earnings have benefited from increased vertical integration and diversification, although its aggressive investment plans pose a risk. Sinochem HK is strategically important to China's agriculture and food security due to its role in potash imports and stockpiling reserves. Its niche position in the property sector helps to generate strong cash flow and anchors its earnings profile. A business transition in oil and gas is underway, and the company will likely look for further acquisitions in the upstream E&P segment in the coming years. Hence, while overall EBITDA is increasing, FCF will remain negative and leverage is unlikely to improve materially in 2013.
Figure 54: Company structure
SASAC (PRC) 100% 100% COSCO Group Sinochem Group (PRC) (PRC) 98% 2% Sinochem Corp. (PRC) 100% Sinochem Overseas Sinochem Hong Kong (Group) Co. Ltd. 100% Capital Co. Ltd. (Hong Kong) (British Virgin Islands) USD Notes Guarantee
Oil and gas Fertiliser Real estate Trading and others 100% 52.7% 62.9% Sinochem Sinofert Holdings Franshion Petroleum Ltd. (Bermuda) Properties China Ltd. (Hong Kong) Sinochem 100% 100% International Chemical (Hong Emerald Energy PLC Kong) Co. Ltd. 100% 100% Sinochem International Sinochem Asia Oil (London) Co. Ltd. Holdings
100% 100% Sinochem International Sinochem Europe Petroleum (Bahamas) Capital Corp. Ltd.
100%
Sinochem International Oil (Singapore) Pte. Ltd.
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 36
Credit Alert
Key credit considerations Important position in fertiliser: Sinochem HK is China's largest importer and distributor of fertiliser, with production capacity of 10mt across the four major fertiliser products and more than 15% share of a highly fragmented market. Given China‟s lack of natural potassium deposits, shrinking arable land area, and rising consumption, a reliable supply of imported potash is indispensable to the country‟s food security. Sinochem HK is dominant in potash imports (share of more than 50%) and production given its well-established relationships with some of the world‟s major potash producers (Potash Corp. has a 22.3% stake in Sinofert). However, besides the inherent volatility of fertiliser prices, the company faces regulatory risks due to government control of potash fertiliser prices. Sinochem HK also has a mandate to stockpile off-season fertiliser reserves, which exposes it to inventory risks (and led to an EBITDA loss of HKD 2.5bn in 2009). In H1-2012, Sinofert‟s sales volume rose 7.8% y/y and gross margin improved 80bps to 6.5%. Business transition in oil and gas: Sinochem HK has a strong position in crude oil trading (10% share of China‟s imports), which is conducted mostly on a back-to-back basis. Despite high price volatility, the company has enjoyed gross margins of 0.4- 0.6% (typical for oil trading). Sinochem HK entered the E&P sector in 2002, although the scale of its business is still small (23 assets in 10 countries with proven reserves of 294mmboe and production of 64kboed in 2011). In 2011, it acquired a 40% interest in Brazil's Peregrino oilfield for USD 3.1bn (200mmboe of reserves). Given the expected ramp-up of Peregrino‟s production, the E&P segment will become a key contributor to future cash flow. In H1-2012, the oil and gas segment posted a 25% y/y increase in EBIT, although with a number of projects in the exploration stage, we believe it faces considerable execution risk. Real estate: Franshion enjoys a niche position and has a strong investment portfolio of commercial properties and hotels. However, its credit profile is tempered by large investment plans and modest cash-flow protection metrics. In H1-2012, the company‟s contracted sales increased to HKD 13bn, and property-leasing EBITDA increased 11% y/y (debt/capital was broadly flat at 45.8%). Financial metrics are weak for its ratings: While Sinochem HK‟s businesses are cyclical, diversification has improved its earnings profile – EBITDA increased to HKD 7.5bn in 2011 from HKD 5.2bn in 2007 and likely rose further in 2012. However, debt-funded E&P acquisitions, land premium payments for property development, and working-capital outlays in the trading business have led to large negative FCF in the past three to four years. In H1-2012, debt rose 7.5% to HKD 68.2bn and debt/EBITDA was at 7x. Sinochem HK plans to keep liabilities/assets within 60-65% and debt/equity within 100%. Given that the company is still in a high-investment phase, it will likely generate large negative discretionary cash flow in 2013-14. Hence, we do not forecast a major improvement in its financial metrics. Sinochem HK‟s liquidity position is moderate, and refinancing risk is low due to its SOE status. Separately, Sinochem HK and Sinochem Corp. are unlisted, and their disclosure is neither adequate nor timely. Strategic importance and potential support: Sinochem HK is strategically important due to its dominant position in fertilisers (potash imports and off-season reserves) and its growing role in the energy sector. It has received capital injections (HKD 1.2bn in H1-2012), inter-company loans and guarantees from Sinochem Group. The sovereign linkage and expected government support led to rating uplifts from Moody‟s (four notches), S&P (three notches) and Fitch (two notches). A partial privatisation of Sinochem Corp. was contemplated, but is currently on the back burner and is unlikely to materialise in the next 6-12 months.
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Credit Alert
Figure 56: Sinofert’s volume and margin (mt – LHS, % – Figure 55: Franshion’s revenue breakdown (HKD bn) RHS)
7 Development Leasing Hotel Others 18 Volume 10 16 6 8 14 Gross margin 5 Thousands (RHS) 12 6 4 10 4 8 3 6 2 2 4 0 1 2
0 0 -2 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 57: Revenue breakdown by business (HKD bn) Figure 58: EBIT breakdown by business (HKD bn) 500 Oil and gas Fertiliser Real estate Others 10 Oil and gas Fertiliser Real estate Others 8 400 6
300 4
2 200 0
100 -2
-4 0 2008 2009 2010 2011 H1-2012 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 59: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 283,225 217,593 293,686 412,671 198,863 EBITDA 6,388 2,268 5,566 7,516 4,847 Gross interest expense (1,104) (1,064) (1,332) (2,513) (1,399) Profit before tax 6,349 3,324 7,732 6,677 5,018 Net income 4,072 2,929 5,224 2,856 2,600 Balance sheet (HKD mn) Cash and equivalents 10,877 5,710 17,220 19,000 15,681 Total assets 109,236 119,441 154,742 203,841 209,066 Total debt 31,744 33,207 42,109 63,369 68,157 Net debt 20,867 27,497 24,889 44,369 52,476 Shareholders‟ equity 34,254 45,744 54,863 70,665 75,088 Cash flow (HKD mn) Net operating cash flow (5,294) (5,823) 10,724 10,352 (1,393) Capex and investments (16,850) (9,304) (6,096) (29,442) (1,998) Free cash flow (22,144) (15,127) 4,628 (19,090) (3,391) Dividends (755) (404) (89) (2,882) (55) Key ratios EBITDA growth (%) 21.7 (64.5) 145.4 35.0 48.6 EBITDA margin (%) 2.3 1.0 1.9 1.8 2.4 Operating ROCE (%) 8.6 1.2 4.1 4.5 5.0 Total debt/capital (%) 48.1 42.1 43.4 47.3 47.6 Total debt/EBITDA (x) 5.0 14.6 7.6 8.4 7.0 Net debt/EBITDA (x) 3.3 12.1 4.5 5.9 5.4 RCF/debt (%) 14.5 4.2 9.0 2.4 NA EBITDA/interest (x) 5.8 2.1 4.2 3.0 3.5
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 38
Credit Alert
China Merchants Holdings (International) Co. Ltd. Bharat Shettigar, +65 6596 8251 China Merchants Holdings (International) Co. Ltd. (CMHI) invests in and manages [email protected] ports. It has interests in a number of ports, including Hong Kong and Shenzhen in the Pearl River Delta; Ningbo and Shanghai in the Yangtze River Delta; and Qingdao and Tianjin in the Bohai Rim. Outside Greater China, it is involved in four projects – Nigeria, Sri Lanka, Togo and Vietnam. In 2011, its ports had container throughput of 57.3mn TEUs and bulk cargo throughput of 325mt. CMHI also has a 25.5% stake in China International Marine Container Group Co. Ltd. (CIMC), the world‟s largest container manufacturer. CMHI is listed in Hong Kong and is 54.7% owned by China Merchants Group Ltd. (CMG), a conglomerate ultimately owned by SASAC.
Credit outlook – Stable The company has a well-diversified portfolio of port assets in Greater China, with a long-established track record of steady earnings and high market share. Its bonded logistics and cold chain operations are growing strongly and are now important contributors to cash flow. That said, the company is currently expanding overseas with large port projects in Colombo (Sri Lanka) and Togo. Hence, we expect annual investment spending to remain high at c.HKD 3.5bn in 2013-14, which will lead to a moderation in its credit metrics. That said, barring large acquisitions, we expect the company to maintain its current ratings.
Figure 60: Company structure
SASAC (China) 100%
China Merchants Group Limited (PRC) 100%
China Merchants Steam Navigation Co. Ltd. (PRC)
100%
China Merchants Holdings (Hong Kong) Co. Ltd. (Hong Kong)
Ship repairs, offshore engineering Financial services Ports and related services and others
54.66% 100% USD Notes Guarantee
China Merchants Finance subsidiary China Merchants China Merchants Industry 42.1% Securities (British Virgin Holdings Holdings; Hoi Tung Marine Islands) 100% (International) Co. Ltd. Machinery Suppliers; China (Hong Kong) Merchants Loscam International China Merchants China Direct 24.7% Investment Ltd. Bonded logistics and cold Port-related manufacturing Ports business chain operations operations 27.01% Varied interests 25.0%
Presence in ports in China China Merchants Modern Terminals China International Marine and Hong Kong and 4 Americold Logistics Ltd. (Hong Kong) Containers (Group) Co. Ltd. overseas projects Co. Ltd.
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 39
Credit Alert
Key credit considerations Excellent portfolio of port assets: CMHI is China‟s largest port operator, with its assets handling around 31% of China‟s container throughput in 2011. It has strong market positions in Shanghai, Shenzhen, Hong Kong, Ningbo and Qingdao, all of which are among the world‟s top 10 ports. Its well-diversified portfolio generates relatively stable operating cash flow and dividends, and will mitigate the impact of the gradual migration of manufacturing activity from the Pearl River Delta. However, in 10M-2012, total container throughput at CMHI‟s ports increased by only 4.7% y/y and bulk cargo volume was up only 0.5%, owing to China‟s slowing economy and weaker global trade flows. We expect container throughput growth at CMHI's ports to be around 5% in 2013, while margins will be under pressure due to rising labour costs and higher fuel charges and taxes. Overseas expansion: Currently, only one of CMHI‟s four overseas projects is operational (Nigeria, in which CMHI has an effective 28.5% stake). The first phase (two berths) of the Colombo project will be operational in H2-2013, while the second phase (two berths) will come onstream in 2014. In July 2012, CMHI paid EUR 150mn for a 50% stake in Thesar Maritime Ltd., which is developing the 2.2mn TEU project in Togo (expected to be operational in late 2013 or early 2014). Also recently it has taken a 23% stake in operating port assets in Djibouti. While CMHI is an early mover seeking long-term opportunities through its overseas projects, it faces high financial and execution risks in the near term. Non-ports are an increasing contributor to earnings: CMHI‟s non-port businesses include logistics services (bonded logistics and cold chain operations), port-related manufacturing (mainly container boxes) and property development (through China Nanshan). The non-port businesses generated EBIT of HKD 1.13bn and contributed 32% of CMHI's total EBIT in H1-2012. While the logistics and cold chain operations are likely to maintain their strong growth momentum in 2013, we expect lower earnings at CIMC to affect CMHI‟s dividend inflows. Also, the tough real estate market will impact earnings at China Nanshan. Complex group structure: CMHI does not have controlling interests in a number of its port assets; hence, they are equity-accounted and are not fully reflected on the balance sheet. That said, it is adopting a strategy of majority ownership or operational rights in its new investments. In 2010, it acquired a majority stake in China Nanshan, while in the past, it had consolidated its investments in Shekou Container Terminal (80%), Haixin port (67%) and Mawan port (70%). We expect CMHI to try to increase its stake in the Shanghai port (24.5%) over the long term. Moderate financial profile: We expect CMHI to post EBITDA growth of 8-10% in 2013 as modest throughput growth is offset by strong performance in the logistics and cold chain businesses. In the past, CMHI has shown a willingness to adjust its investment spending in line with earnings, and has consistently posted positive FCF since 2008. That said, with dividend payout ratios of 40-45%, discretionary cash flow has been negative. Looking ahead, although the pace of capacity expansion at the China ports will be slow, the company will invest in its Sri Lanka (USD 500mn) and Togo projects. Hence, we expect annual investment spending of c.HKD 3.5bn in 2013-14 (versus HKD 2.4bn in 2011). This will result in a slight weakening of CMHI‟s credit metrics, although we do not expect pressure on its ratings. The company has a strong liquidity profile, with HKD 12.2bn of cash and HKD 13.6bn of undrawn committed facilities as of June 2012. Strong parentage: While CMHI is ultimately owned by SASAC, it has a long history of independent management, and its operations are largely commercially driven. That said, it has received support from CMG in the form of low-interest-rate financing and subscription to scrip dividends instead of cash dividends.
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Credit Alert
Figure 61: Container throughput (mn TEUs) Figure 62: Bulk and general cargo throughput (mt) 60 PRD ex-HK Hong Kong YRD Others 350 PRD ex-HK Hong Kong YRD
50 300 250 40 200 30 150 20 100
10 50
0 0 2007 2008 2009 2010 2011 H1-2012 2007 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 63: Operating profit by segment (HKD mn) Figure 64: Debt profile (Jun-12)
8,000 Ports Ports related mfg. Fixed CMG loan CNY <2Y Floating Bonds Foreign 2-5Y 100% 6,000 80%
4,000 60%
40% 2,000 20%
0 0% 2008 2009 2010 2011 H1-2012 Interest rate Category Currency Duration Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 65: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 6,831 3,588 5,811 9,470 4,793 EBITDA 3,868 3,261 4,347 6,469 3,371 Gross interest expense (682) (703) (825) (1,148) (684) Profit before tax 4,315 3,735 7,238 7,686 2,967 Net income 3,706 3,238 5,876 5,569 1,756 Balance sheet (HKD mn) Cash and equivalents 2,806 3,206 6,352 6,811 12,220 Total assets 50,493 52,468 78,351 87,086 94,031 Total debt 14,210 14,459 22,272 24,726 27,538 Net debt 11,404 11,253 15,920 17,915 15,318 Shareholders‟ equity 32,714 35,619 49,371 54,760 55,371 Cash flow (HKD mn) Net operating cash flow 3,077 2,084 2,173 3,623 2,553 Capex and investments (2,547) (1,224) (1,275) (2,383) (1,209) Free cash flow 530 860 898 1,240 NA Dividends (1,770) (1,585) (1,277) (3,242) NA Key ratios EBITDA growth (%) 14.4 (15.7) 33.3 48.8 7.1 EBITDA margin (%) 56.6 90.9 74.8 68.3 70.3 Operating ROCE (%) 6.9 5.0 5.5 6.7 6.7 Total debt/capital (%) 30.3 28.9 31.1 31.1 33.2 Total debt/EBITDA (x) 3.7 4.4 5.1 3.8 4.1 Net debt/EBITDA (x) 2.9 3.5 3.7 2.8 2.3 RCF/debt (%) 22.7 18.2 15.5 20.1 NA EBITDA/interest (x) 5.7 4.6 5.3 5.6 4.9
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 41
Credit Alert
China Overseas Land & Investment Ltd.
Feng Zhi Wei, +65 6596 8248 Incorporated in 1979 and listed on the HKSE in 1992, China Overseas Land & [email protected] Investment Ltd. (COLI) is an indirectly state-owned property developer. It is 53.18% owned by China Overseas Holdings Limited, a wholly owned subsidiary of the SSE- listed China State Construction Engineering Corporation Limited (CSCECL). CSCECL is c.54.9% owned by the China State Construction Engineering Corp., which is under the direct supervision of SASAC. As of June 2012, COLI had a total land bank of 34.36mn sqm (attributable GFA of 30.22mn sqm), and its 38%-owned China Overseas Grand Oceans Group (COGO) had a total land bank of 7.50mn sqm (attributable GFA of 6.17mn sqm).
Credit outlook – Stable COLI achieved strong contracted sales of HKD 106bn (c.CNY 85bn) in 11M-2012, outperforming peers amid a tough operating environment and exceeding its full-year sales target of HKD 80bn. Land expansion continues – together with COGO, COLI added 5.9mn sqm of GFA to its land bank at an attributable cost of CNY 20.6bn in 11M-2012, compared with land purchases of CNY 24.0bn in 2011 and CNY 20.4bn in 2010. A moderation in land purchases, coupled with continued high asset turnover, helped COLI to maintain a strong credit profile and sound liquidity (free cash totalled HKD 25.6bn as of June 2012). COLI also raised a total of USD 1bn of 10Y/30Y bonds in November. Given its strong liquidity, we expect land acquisitions to pick up in the coming months.
Figure 66: Company structure
SASAC (PRC) China National Council for Social Security Fund (4%), 100% Baosteel (1.1%), CNPC (1.1%), Sinochem Group China State Construction Engineering Corp. (PRC) (1.1%) and public investors
54.14% 46.4% China State Construction Engineering Corp. Ltd. (PRC)
100% 100% China Overseas Holdings Ltd. (Hong Kong)
46.95% 6.18% Silver Lot Development Limited
China Overseas Land & Investment Ltd. 100% Finance subsidiaries (Hong Kong) (Cayman Islands)
USD Notes Guarantee 37.9%
China Overseas Grand Oceans Ltd.
100% Majority-owned subsidiaries/project companies Project companies
Sources: Company reports, Standard Chartered Research
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Credit Alert
Key credit considerations Contracted sales outperformed peers’: COLI sold HKD 105.9bn worth of property (GFA of 6.86mn sqm) in 11M-2012, significantly exceeding its full-year target of HKD 80bn. Mainland China projects accounted for HKD 98.7bn (93%), while the remainder was from Hong Kong and Macau projects. The ASP achieved for sales in mainland China fell 5% y/y to HKD 14,530 psm in 11M-2012, in line with the general market trend. Geographically, sales contributions were largely balanced – the Yangtze River Delta region accounted for 25.3% of total mainland China sales, followed by the Bohai Rim area (20.2%), the Pearl River Delta (20.1%) and the northern region (17.8%). Land-market activity continued in 11M-2012: The company added 5.9mn sqm of GFA to its land bank in 11M-2012, at a total attributable cost of CNY 20.6bn. In comparison, attributable land cost totalled CNY 24.0bn in 2011 and CNY 20.4bn in 2010. Most of the acquisitions were concluded in H2 (COLI‟s total attributable land bank was unchanged at c.34.4mn sqm as of June 2012). Asset turnover and profitability remained decent: Revenue from property sales totalled HKD 23.8bn in H1-2012, up 7.1% y/y. Despite challenging market conditions, profit margins held steady in H1-2012. Gross margin was 40.9% (40.7% in H1-2011), and EBITDA margin was 37.3% (37.0% in H1-2011). However, we expect some downward pressure on profitability given the lower ASP of contracted sales in 9M- 2012. Liquidity position and credit metrics remained solid: Including restricted cash, total cash was HKD 30.3bn as of September 2012, up from HKD 26.6bn as of June 2012 and HKD 19.2bn at end-2011. In H1-2012, COLI issued USD 750mn of 5Y bonds and raised a HKD 7.6bn 3Y club loan. In November, it issued USD 700mn of 10Y bonds and USD 300mn of 30Y bonds. Total debt increased 21% to HKD 51.7bn as of June 2012. Of this, short-term debt totalled HKD 12.5bn (including USD 300mn of 2012 bonds redeemed in July). Despite higher debt, credit metrics remained largely stable thanks to high asset turnover and stable profitability. Total debt/LTM EBITDA edged up to 2.6x in H1-2012 from 2.3x in 2011, and LTM EBITDA/interest remained high at 13.0x. Total debt/capital rose slightly to 39.8% as of June 2012 from 37.2% at end-2011, but net debt/capital fell marginally to 24.3% from 24.6% due to the higher cash level. Land purchases are likely to pick up: COLI enjoys good access to cheap onshore and offshore funding sources. This, coupled with its strong liquidity, is likely to result in accelerated land banking in the coming months. However, this should be matched by strong contracted sales and good asset turnover, generating robust liquidity and decent profits. Consistently strong sales and project delivery will underpin COLI‟s healthy credit profile, in our view.
GR13JA | 14 January 2013 43
Credit Alert
Figure 67: Profitability (HKD bn – LHS, % – RHS) Figure 68: Debt metrics (x) 55 100 5 LTM 15 50 EBITDA/int. Revenue (RHS) 45 80 4 12 40 35 EBITDA 60 3 9 30 margin (RHS) 25 40 2 Total 6 20 debt/LTM 15 EBITDA 1 3 10 20 5 0 0 0 0 2008 2009 2010 2011 H1-12 2008 2009 2010 2011 LTM Jun-12 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 69: Debt metrics (HKD bn – LHS, % – RHS) Figure 70: Debt maturity (HKD bn, Jun-12) 55 100 30 50 45 80 25 Bonds 40 35 Total debt/cap. 20 60 30 (RHS) Total debt 15 25 40 20 10 Bank loan 15 Total cash* 20 10 5 5 0 0 0 2008 2009 2010 2011 H1-12 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 71: Summary financials 2009 2010 2011 H1-11 H1-12 Income statement (HKD mn) Revenue 37,322 44,313 48,583 21,883 25,282 EBITDA 10,491 15,921 18,819 8,523 9,421 Gross interest expense (829) (1,194) (1,474) (688) (855) Profit before tax 12,054 20,567 23,765 11,032 12,766 Net income 7,469 12,373 15,119 6,839 8,385 Balance sheet (HKD mn) Cash and equivalents* 23,781 31,574 17,841 18,195 25,579 Total assets 114,117 162,248 175,975 158,951 196,292 Total debt 23,666 44,538 42,624 41,848 51,690 Net debt (196) 12,515 23,444 23,653 25,093 Shareholders‟ equity 41,810 57,942 71,890 61,453 78,249 Cash flow (HKD mn) Net operating cash flow 8,385 (3,297) (9,087) NA NA Capital expenditure (24) (1,707) (1,601) NA NA Free cash flow 8,361 (5,004) (10,688) NA NA Dividends (1,302) (2,012) (2,458) (1,389) (1,635) Key ratios EBITDA growth (%) 57.3 51.8 18.2 31.9 10.5 EBITDA margin (%) 28.1 35.9 38.7 38.9 37.3 Total debt/capital (%) 36.1 43.5 37.2 40.5 39.8 Total debt/EBITDA (x) 2.3 2.8 2.3 2.3 2.6 Net debt/EBITDA (x) NM 0.8 1.2 1.3 1.3 EBITDA/interest (x) 12.7 13.3 12.8 12.4 10.6
*Excluding restricted cash; Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 44
Credit Alert
China Resources Power Holdings Co. Ltd.
Bharat Shettigar, +65 6596 8251 China Resources Power Holdings Co. Ltd. (CR Power) is an independent power [email protected] producer (IPP) that invests in and operates power plants in China. It was incorporated in Hong Kong in 2001 and was listed on the HKSE in November 2003. As of June 2012, it operated 59 plants with a total capacity of 22,440MW. Of this capacity, 92.6% is coal-fired, while the remainder is based on wind, hydropower and gas. CR Power has also invested in upstream coal assets, and in H1-2012, it produced 8.6mt of coal. CR Power is 63.6% owned by China Resources (Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by China‟s State Council through China Resources National Corporation.
Credit outlook – Stable We have a Stable credit outlook on CR Power. The company has a competitive operating profile thanks to geographical advantages, high utilisation rates and a sizeable mix of co-generation plants and investment in coal mines. This has led to higher EBITDA margins than its IPP peers‟. However, regulated tariffs have resulted in pressure on profitability, while debt-funded investments have kept leverage elevated. We expect the balance sheet to improve gradually as the company tries to manage capex and investments in line with its operational cash flow. CR Power‟s track record of raising equity/hybrid capital and its flexibility to partly defer capex lead us to believe that it will maintain its investment-grade rating.
Figure 72: Company structure
SASAC (PRC)
100%
China Resources National Corporation (PRC)
100%
China Resources Co. Ltd. (PRC)
100%
CRC Bluesky Ltd.
100%
China Resources (Holdings) Co. Ltd. (PRC)
Varied interests 100%
Finetex International Limited CR Gas, CR Land, CR Cement, CR Enterprises, etc. (British Virgin Islands) 64%
China Resources Power Holdings Co. Ltd.* (Hong Kong)
USD Perpetual Notes Varied interests 100% Guarantee
Subsidiaries and associates that own and/or operate power plants (including wind farms and hydro plants) and coal mines Finance subsidiaries
*CR Power is the issuer and guarantor of the USD senior bonds; Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 45
Credit Alert
Key credit considerations Competitive operating profile: CR Power has plants in nine of China‟s top 10 provinces and municipalities in terms of GDP. Nearly 70% of its output comes from Guangdong, Jiangsu and Henan Provinces, which have high urbanisation rates and have experienced double-digit demand growth in recent years. As a result, CR Power has been able to maintain high plant utilisation rates at its coal plants (2,797 hours in H1-2012 versus the national average of 2,489 hours) and above-average on-grid tariffs. CR Power has not chased capacity growth and has typically set up large plants (1,000MW and 600MW). Also, about 25% of its capacity is in co-generation plants (electricity plus steam), which consume less coal and are despatched based on steam demand, leading to higher utilisation. Hence, CR Power has been able to maintain cost-competitive operations and higher EBITDA margins than China‟s other IPP groups. Regulatory risks: China‟s electricity tariff mechanism is not transparent; on-grid tariffs are regulated, while coal prices are largely market-driven. In December 2011, the government hiked on-grid tariffs by 5-7% for a number of CR Power‟s plants and announced a cap on spot-market coal prices. As a result, in H1-2012, CR Power‟s tariffs increased 6.2% y/y while per-unit fuel costs increased only 0.6%, thereby improving its EBITDA margins (24.5% versus 22.4% in H1-2011). Backward integration: Given the absence of a cost-pass-through mechanism, CR Power is increasing its coal self-sufficiency ratio. It has invested in coal assets in Shanxi Province – in March 2011, it paid USD 669mn for AACI (HK), and in April 2012, it increased its stake in Shan Xi China Resources Coal Ltd. for a consideration of CNY 449mn. CR Power‟s coal operations accounted for 16% of H1-2012 operating profit. It aimed to produce 18mt of coal in full-year 2012, and increase this to 25mt in 2013 and 30mt in 2014, which will protect its overall margins to an extent. The company has also been increasing its wind-power capacity (6.5% currently versus 3.4% in 2010), which has higher profitability. Gradual deleveraging due to slowing capex: CR Power has shown strong growth, with EBITDA increasing at a 30% CAGR over 2006-11. In H1-2012, generation volumes declined 0.5% due to the economic slowdown, although profitability improved for the reasons explained above. Given its largely debt-funded investments in recent years (debt rose to HKD 83bn in 2011 from HKD 26.6bn in 2007), the company‟s leverage increased to 6.8x as of end-2011. However, CR Power has slowed its capacity expansion plans – we expect annual spending of around HKD 16- 18bn in 2012-13, compared with c.HKD 20-22bn in recent years. In H1-2012, it posted marginal free cash flow, and we believe future investments will broadly be in line with operational cash flow. CR Power‟s internal target is to maintain debt/capital below 65% and EBITDA interest cover above 4x. In the past, the company has raised equity (HKD 5.9bn in 2009) and perpetual bonds (USD 750mn in 2011) to maintain its capital structure and ratings. We believe it has the flexibility to partly defer capex, and therefore expect a gradual improvement in leverage (although it is likely to remain above 5x in 2013). Hence, we do not see a risk of a rating downgrade. CR Power has termed out its debt maturities (61.5% of debt is due after two years, versus 41% at end-2009), and we do not see it facing liquidity risks in the near term. Moderate strategic importance: While CR Power is ultimately owned by China‟s State Council, we believe its strategic importance to the sovereign is moderate at best. It accounts for only 2% of China‟s installed power capacity, while other IPP groups are much larger. However, the company‟s importance and strong linkage to CRH leads to a one-notch rating uplift by both Moody‟s and S&P.
GR13JA | 14 January 2013 46
Credit Alert
Figure 73: Operating data (’000 MW – LHS, bn kWh – RHS) Figure 74: Fuel costs (CNY per MWh – LHS, % – RHS) 25 140 300 EBITDA 40 Generation 120 margin (RHS) 35 20 (RHS) 250 100 30 200 15 Fuel cost 25 Capacity 80 150 20 60 10 15 100 40 10 5 50 20 5 0 0 0 0 2007 2008 2009 2010 2011 H1-2012 2007 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 75: Operating profit by segment (HKD mn) Debt maturity profile – June 2011 (HKD bn) 12,000 35 30 10,000 25 8,000 Coal mining 20 6,000 Electricity 15
4,000 10
2,000 5
0 0 2007 2008 2009 2010 2011 H1-2012 < 1Y 1-2 Y 2-5 Y > 5Y Perpetual Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 76: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 26,772 33,214 48,578 60,709 30,945 EBITDA 5,737 10,284 11,398 12,564 7,595 Gross interest expense (1,712) (1,932) (2,527) (3,650) (2,114) Profit before tax 2,152 6,408 6,517 6,728 3,758 Net income 1,717 5,317 4,904 4,451 3,002 Balance sheet (HKD mn) Cash and equivalents 5,603 8,172 7,132 4,801 6,671 Total assets 79,650 118,926 143,011 168,366 171,120 Total debt 37,671 56,484 74,911 82,987 88,362 Net debt 32,068 48,312 67,779 81,137 81,691 Shareholders‟ equity 30,161 45,155 50,260 58,622 60,875 Cash flow (HKD mn) Net operating cash flow 4,222 7,204 7,955 7,986 6,363 Capex and investments (15,846) (22,727) (21,238) (20,688) (6,091) Free cash flow (11,623) (15,522) (13,283) (12,702) 272 Dividends (1,571) (1,085) (2,455) (2,836) (1,171) Key ratios EBITDA growth (%) (0.5) 79.3 10.8 10.2 16.8 EBITDA margin (%) 21.4 31.0 23.5 20.7 24.5 Operating ROCE (%) 4.8 8.3 6.3 5.2 6.2 Total debt/capital (%) 55.5 55.6 59.8 59.4 59.2 Total debt/EBITDA (x) 6.6 5.5 6.6 6.8 5.8 Net debt/EBITDA (x) 5.6 4.7 5.9 6.5 5.4 RCF/debt (%) 7.3 12.0 8.1 7.7 NA EBITDA/interest (x) 3.4 5.3 4.5 3.4 3.6
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 47
Credit Alert
China Resources Land Ltd.
Feng Zhi Wei, +65 6596 8248 Listed on the HKSE in 1996, China Resources Land Ltd. (CRL) is an indirectly state- [email protected] owned property developer. As of June 2012, China Resources Holdings Company Limited (CRH) held a 68% interest in CRL. CRH is one of the 16 companies controlled by SASAC. As of 12 August 2012, CRL had expanded to 39 Chinese cities from 32 cities a year earlier. It had a geographically diversified land bank totalling about 28.19mn sqm, including 23.63mn sqm of residential properties at various stages of development, and 4.56mn sqm of investment property under construction. In addition, it had 1.87mn sqm of completed investment property in operation.
Credit outlook – Stable CRL owns a sizeable number of quality investment properties, which generated HKD 1.9bn of recurring income in H1-2012. It achieved strong contracted sales of CNY 37.7bn in 9M-2012, meeting 94% of its full-year target. Its SOE status gives it relatively easy access to both onshore and offshore capital markets at a low funding cost. However, leverage is high, with total debt of HKD 65.7bn as of June 2012 (including ST debt of HKD 18.5bn). Of this, HKD 31.6bn is subject to CRH holding a minimum interest of 35% in CRL and the central government holding a stake of more than 50% in CRH. Liquidity is sufficient, with HKD 19.8bn of total cash. CRL raised HKD 18.0bn of new debt and repaid HKD 12.9bn of bank loans in H1-2012.
Figure 77: Company structure
SASAC (PRC)
100%
China Resources National Corporation (PRC)
100%
China Resources Co. Ltd. (PRC)
100%
China Resources (Holdings) Co. Ltd. (PRC)
Varied interests 100%
CR Gas, CR Power, CR Cement, CR Enterprises, etc. Gain Ahead Group Ltd./Commotra Co. Ltd.
67.95%
China Resources Land Limited (Cayman Islands)
Property Development Investment Property Value-added Services
Varied interests Varied interests 100%
CR Construction Projects in China Projects in China Uconia Logic Furniture
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 48
Credit Alert
Key credit considerations Contracted sales performed well: Contracted sales rose 56% y/y in 9M-2012 to CNY 37.68bn, meeting 94% of the full-year sales target of CNY 40bn. This was c.5% higher than CRL‟s full-year 2011 contracted sales of CNY 35.9bn. The ASP was maintained at above CNY 11,000 psm in 9M-2012, despite the downward price trend nationwide. Sizeable investment portfolio: CRL‟s high-quality investment portfolio grew further to 1.87mn sqm as of June 2012 from 1.47mn sqm a year earlier. As such, total recurring income from property leasing and hotel operations rose 33% y/y to HKD 1.9bn in H1-2012. In addition, the company had 4.56mn sqm of investment property under construction, including 2.9mn sqm of commercial/retail space, 933,367sqm of offices and 687,379sqm of hotels. Revenue was stable in H1-2012: Revenue totalled HKD 7.9bn in H1-2012, compared with HKD 7.7bn in H1-2011. The marginal decline in sales revenue to HKD 5.4bn was offset by the increased contribution from investment properties. We expect revenue recognition to increase in H2-2012 given the high contracted sales achieved in 2010-11. In total, CRL had about CNY 60.5bn of sales to be recognised in 2012 and thereafter. Of this, CNY 26.88bn of development revenue had been locked in for 2012. Profitability improved in H2-2012 – gross margin rose to 47.6% from 39.6% in 2011, and EBITDA margin increased to 33.5% from 30.3%. Leverage remained high but is likely to improve on higher revenue booking: Total debt continued to rise, to HKD 65.7bn as of June 2012 from HKD 60.7bn at end-2011 and HKD 37.8bn at end-2010. Of this, ST debt remained high at HKD 18.5bn (but lower than the HKD 22.1bn at end-2011). Credit metrics deteriorated further, albeit marginally, in H1-2012 – total debt/capital rose slightly to 48.7% as of June 2012 from 47.8% at end-2011, total debt/LTM EBITDA edged up to 5.9x in H1- 2012 from 5.6x in 2011, and LTM EBITDA/interest fell to 5.0x from 6.2x. However, we expect credit ratios to have improved for full-year 2012 on higher revenue recognition in H2. Liquidity is strong: CRL maintained strong liquidity thanks to satisfactory contracted sales. Total cash was high at HKD 19.8bn as of June 2012, up from HKD 15.4bn at end-2011. In H1-2012, the company raised HKD 18.0bn of new bank loans and repaid HKD 12.9bn of loans. Land expansion picked up significantly in H2-2012: In H1-2012, the company added two land parcels in Rizhao and Shenyang with total GFA of 0.89mn sqm. Land purchases accelerated in H2. CRL invested CNY 7.8bn in land purchases in August- September and acquired a 55% interest in a Nanning project from its parent for a cash consideration of c.HKD 2.1bn in November.
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Credit Alert
Figure 78: Profitability (HKD bn – LHS, % – RHS) Figure 79: Debt metrics (x) 40 100 10 10 35 80 8 Total 8 30 Revenue debt/LTM EBITDA EBITDA 25 margin (RHS) 60 6 6 20 LTM 40 4 4 15 EBITDA/int. (RHS) 10 20 2 2 5 0 0 0 0 2008 2009 2010 2011 LTM Jun-12 2008 2009 2010 2011 H1-12 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 80: Debt metrics (HKD bn – LHS, % – RHS) Figure 81: Debt maturity estimate (HKD bn, Jun-12) 70 100 25
60 80 20 Senior 50 notes 60 15 40 Total debt/cap. (RHS) 30 40 10 Bank Total debt loans 20 20 5 10 Total cash 0 0 0 2008 2009 2010 2011 H1-12 < 1yr 1-2 yrs 2-5 yrs > 5 yrs Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 82: Summary financials 2009 2010 2011 H1-11 H1-12 Income statement (HKD mn) Revenue 16,650 25,729 35,795 7,681 7,919 EBITDA 4,705 8,645 10,850 2,313 2,657 Gross interest expense (714) (1,106) (1,751) (792) (1,299) Profit before tax 7,030 11,614 14,373 5,289 5,610 Net income 4,304 6,026 8,070 3,608 3,689 Balance sheet (HKD mn) Cash and equivalents 19,873 12,554 15,368 18,660 19,784 Total assets 101,187 131,715 180,586 158,163 206,054 Total debt 27,459 37,807 60,725 55,075 65,705 Net debt 7,586 25,835 45,357 36,415 45,921 Shareholders‟ equity 38,880 49,415 66,362 53,438 69,225 Cash flow (HKD mn) Net operating cash flow 8,311 (11,918) (6,623) (5,723) (614) Capital expenditure (3,448) (1,689) (3,102) (4,877) (1,434) Free cash flow 4,968 (17,104) (9,725) (10,600) (2,048) Dividends (688) (1,392) (1,710) NA NA Key ratios EBITDA growth (%) 100.2 83.8 25.9 (43.1) (69.0) EBITDA margin (%) 28.3 33.6 30.3 30.1 33.5 Total debt/capital (%) 41.4 43.3 47.8 50.8 48.7 Total debt/EBITDA (x) 5.8 4.4 5.6 8.1 5.9 Net debt/EBITDA (x) 1.6 3.0 4.2 5.3 4.1 EBITDA/interest (x) 6.6 7.8 6.2 3.1 2.0
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 50
Credit Alert
Shenzhen International Holdings Ltd.
Bharat Shettigar, +65 6596 8251 Shenzhen International Holdings Ltd. (SZIHL) is an investment holding company [email protected] involved in the construction and operation of toll roads and logistics parks. A large part of its operating assets are located in the city of Shenzhen in Guangdong province. It currently has stakes of 25-100% in 17 expressways (combined length of 731km). SZIHL operates primarily through its 50.9%-owned and listed subsidiary Shenzhen Expressway (SZE); its other two expressways (Longda and Wuhuang) are held directly. It has also invested in six logistics parks (operating area of 530,000sqm) and has a 49% stake in Shenzhen Airlines. SZIHL is listed in Hong Kong, and the Shenzhen government holds a 48.6% stake through the Shenzhen SASAC.
Credit outlook – Stable The company has exhibited strong earnings momentum in recent years due to high traffic growth on its toll roads and a secure business profile. However, regulatory risks are rising, with recent tariff cuts expected to impact toll-road revenue by 9-10%. While the company is diversifying into the logistics business, earnings from the segment will be low and slightly cyclical in the short term. Investment spending in 2013 will be funded through internal cash flow, and leverage will be in the 4.5-5x range. The company could face ratings pressure if it invests significantly in the Qianhaiwan project or in Shenzhen Airlines in 2013-14 (not our base-case scenario).
Figure 83: Company structure
Shenzhen SASAC
100%
Shenzhen Investment Holdings Company Limited (PRC) 48.59%
Shenzhen International Holdings Ltd. (Bermuda)
Logistics Parks Logistics Services Port Toll Roads Others
70% 49% Shenzhen International 100% Shenzhen Shenzhen South China Logistics 100% Nanjing Xibra 50.9% Shenzhen International Total Expressway Co. Co. Ltd. Whart Co. Ltd. Airlines Co. Ltd. Logistics Ltd. (Shenzhen) Co. Ltd. 100% Shenzhen International 55% West Logistics Co. Ltd. Hubei Magerk 45% Expressway 100% Nanjing UT Logistics 68.5% Shenzhen EDI Management Co. Ltd. Co. Ltd. Pvt. Ltd.
55.4% Shandong Booming Total 89.9% Logistics Co. Ltd. Shenzhen Longda Expressway Co. Ltd. Shenzhen International 51% Huatonguan Logistics Co. Ltd.
Sources: Company reports, Standard Chartered Research
GR13JA | 14 January 2013 51
Credit Alert
Key credit considerations Stable cash flow from toll roads: SZIHL has a long operating track record, with seven of its 17 expressways having been in operation for over 10 years. It generates steady, recurring cash flow from its toll roads, as it enjoys a 60% market share in Shenzhen and its concession rights are long-term (to 2022-35). Given Guangdong‟s affluence and high car ownership, many of SZIHL‟s toll roads have enjoyed double- digit traffic growth p.a. over the past decade. In H1-2012, the toll-road segment reported 14.1% y/y growth in revenue and 19.9% growth in EBITDA. While 60-90% of the traffic volume is small cars, toll-road traffic will be slightly affected by the expected slowdown in China‟s trade flows in 2013. The key growth driver will be the Qinglian Expressway, SZIHL‟s largest (opened for traffic in 2009). Regulatory risks increasing: China‟s tariff-setting mechanism lacks transparency, and the regulatory framework does not protect concessionaires completely. The provincial government of Guangdong has not adjusted toll rates for over 10 years. However, double-digit traffic growth has more than offset the inflation impact, and SZIHL‟s profitability has not suffered. That said, in June 2012, the Guangdong government decided to standardise toll co-efficients for all expressways, which will affect some of SZIHL‟s toll roads. In August 2012, the State Council decided to waive toll fees nationwide for passenger cars with a seating capacity of less than seven during four important national holidays (around 20 days a year). The two measures will lower SZIHL‟s revenue by c.9-10%, and we believe there is risk of further negative tariff moves. Diversification into logistics and other businesses: Given the regulatory risks related to toll roads, SZIHL is increasingly focusing on the logistics business. Its logistics parks are located in coastal areas such as Shenzhen, Nanjing and Yantai, and had an average occupancy rate of 95% in H1-FY12. SZIHL will add 130,000sqm of GFA to the South China logistics park in early 2013 and is planning a logistics centre and redevelopment project in Qianhaiwan district, which will require significant capex (details are not available yet). We do not expect this investment to compromise SZIHL‟s balance-sheet strength. In December 2011, SZIHL increased its stake in Shenzhen Airlines (China‟s fifth-largest airline) to 49% from 25% for c.HKD 900mn. The airline has a highly leveraged balance sheet and a weak credit profile; thus, a further stake increase will be negative for the SZIHL credit. Separately, SZIHL plans to divest its 6.4% stake in CSG Holdings Co. Ltd. (a glass manufacturer) in the next two to three years. Linkage with Shenzhen municipality: SZIHL is the Shenzhen government‟s principal platform for logistics and infrastructure investment. The government has injected various logistics and toll-road projects into the company and exerts strong influence on its strategy, even with a stake of less than 50%. In 2008, it extended the interest-free payment period (for CNY 863mn) for SZIHL‟s acquisition of SZE, and in 2010, it converted SZIHL‟s convertible bonds into equity. Financial profile: Strong growth in toll-road traffic helped SZIHL increase its EBIDTA at a CAGR of 27% over 2007-11 while leverage declined to 4.9x from 7.2x during the period. In 2012, it had budgeted HKD 2.03bn on capex (64% on toll roads, 26% on logistics). The company‟s capex cycle has peaked, and future spending will be on the repair and maintenance of toll roads and the expansion of the logistics business. Spending in 2013 is estimated at c.HKD 1.5-2bn; this can be met through operating cash flow of c.HKD 2.3-2.4bn. SZIHL‟s internal target is to keep debt/assets below 65% and the dividend payout at 35%. It had HKD 6.4bn of consolidated cash as of June 2012, although part of its CNY 2.2bn of local bond maturities in 2013 at the SZE level may need to be refinanced.
GR13JA | 14 January 2013 52
Credit Alert
Figure 84: Revenue split (HKD bn) Figure 85: Contributions by expressway (H1-12) 7 Toll revenue Construction services Shenzhen Expressway Longda Expressway Wuhuang Expressay Logistics parks Logistics services 100% 6
5 80%
4 60% 3 40% 2 20% 1
0 0% 2007 2008 2009 2010 2011 H1-12 Revenue split EBIT split Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 86: Capex split (HKD bn) Figure 87: Debt maturity profile (HKD bn, Dec-11) 5 6 Shenzhen Expressway Logistics parks Ports Other toll roads 5 4 4 3 3 2 2
1 1
0 0 2009 2010 2011 2012B <1Y 1-2Y 2-5Y >5Y Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 88: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 5,952 4,081 5,112 5,581 2,857 EBITDA 1,472 1,771 2,801 3,446 1,819 Gross interest expense (660) (735) (797) (857) (494) Profit before tax 1,157 1,444 2,145 2,803 1,311 Net income 575 866 1,280 1,745 805 Balance sheet (HKD mn) Cash and equivalents 3,196 3,995 5,515 5,221 6,384 Total assets 26,915 32,448 36,796 39,901 41,308 Total debt 12,311 14,892 13,950 16,734 18,179 Net debt 9,115 10,898 8,435 11,513 11,796 Shareholders‟ equity 9,883 12,720 17,024 18,148 18,389 Cash flow (HKD mn) Net operating cash flow 1,121 1,303 2,056 1,853 NA Capex and investments (4,871) (4,525) (2,360) (2,463) (619) Free cash flow (3,751) (3,222) (304) (609) NA Dividends (655) (374) (479) (723) NA Key ratios EBITDA growth (%) 12.4 20.4 58.1 23.0 21.4 EBITDA margin (%) 24.7 43.4 54.8 61.7 63.7 Operating ROCE (%) 5.9 6.1 7.5 9.0 9.6 Total debt/capital (%) 55.5 53.9 45.0 48.0 49.7 Total debt/EBITDA (x) 8.4 8.4 5.0 4.9 5.0 Net debt/EBITDA (x) 6.2 6.2 3.0 3.3 3.2 RCF/debt (%) 5.7 7.1 12.2 8.5 NA EBITDA/interest (x) 2.2 2.4 3.5 4.0 3.7
Sources: Company reports, Standard Chartered Research
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Credit Alert
Yanzhou Coal Mining Co. Ltd.
Bharat Shettigar, +65 6596 8251 Yanzhou Coal Mining Co. Ltd. (Yanzhou) is involved in coal mining (including [email protected] washing, processing and trading) and is among the top 10 coal producers in China. It has operating mines in China‟s Shandong, Inner Mongolia, and Shanxi Provinces. It entered Australia in 2004, and Yancoal Australia (YA) currently has nine operating mines in the country. Yanzhou produced 51mt of coal in 2011, of which 67% was thermal coal and the rest was coking coal. Around 80% of its sales are in China and the remainder in Korea, Japan and other countries. Yanzhou is listed in Shanghai, Hong Kong and New York. It is 53% owned by the Yankuang Group, an SOE that is 100% owned by the Shandong SASAC.
Credit outlook – Negative The company enjoys a solid operational profile in China, although rising cost pressures and regulatory changes could affect earnings going forward. While its expansion in Australia has improved the business profile, it has also resulted in significant execution risks. Large investments in recent years have been debt-funded, which has moderated balance-sheet strength. Yanzhou posted a net loss in Q3-2012 due to its high exposure to spot coal prices and integration costs in Australia. Investment spending will remain high in 2013, and we expect leverage in the 3.2-3.5x range. Hence, any sharp decline in coal prices could lead to a rating downgrade.
Figure 89: Company structure
Shandong SASAC
100%
Yankuang Group Corp. Limited (PRC)
52.86% Yancoal International 100% Resources Development Yanzhou Coal Mining Ltd. Co. Limited (PRC) USD Notes (Hong Kong) Guarantee
Coal mines directly under Yanzhou Wholly owned subsidiaries Holding subsidiaries
Yancoal Shanxi Nenghua Company Ltd.
Yancoal Yulin Nenghua Company Ltd.
Yancoal Erdos Nenghua Company Ltd.
Yancoal Australia Ltd.
Yancoal International (Holding) Co. Ltd.
Sources: Company reports, Standard Chartered Research
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Credit Alert
Key credit considerations Solid operational profile in China: Yanzhou is the third-largest publicly listed coal producer in China. Its market position is supported by its location in Shandong Province, which is rich in coal and close to national railway grids and ports. While it is ramping up production in Shanxi, Inner Mongolia and Australia, the Shandong operations will continue to contribute more than 50% of total revenue in the next few years. Also, its China coal output has high calorific value and low ash content, and meets international clean coal standards, which helps it command high ASPs. That said, while Yanzhou has a diversified client base and long-term relationships with large customers such as Huadian Power, Baosteel and POSCO, its main customer accounted for c.20% of its volumes in 2011. Also, its production costs have been increasing in recent years, in line with inflation. Higher risks in Australia: YA has grown through acquisitions – in 2009, it paid AUD 3.3bn to acquire Felix Resources, and in 2011, it paid AUD 500mn to acquire two operating mines. Thus, its Australian output grew to 9.6mt in 2011 from 1.6mt in 2009. Given Yanzhou‟s expertise, YA has progressively ramped up its mining operations and maintained profitable operations, and has not encountered major cost over-runs or project delays as other operators have. The Felix Resources acquisition required Yanzhou to list YA by end-2012 and to reduce its stake in YA to 70% by end-2013. To meet this requirement, YA undertook a merger with Gloucester Coal Ltd. in June 2012, and YA is now listed, with Yanzhou holding a 78% stake. However, the merger has increased cost pressures on the Australian operations, which affected Q3-2012 earnings. It will take a few quarters to realise potential synergies, and this will affect Yanzhou‟s credit metrics. Regulatory risks: China‟s central government is considering a nationwide resources tax, which is likely to be value-based and will replace the weight-based (CNY 10- 20/tonne) tax currently imposed by individual provinces. Given strong demand for coal in China, we do not expect the government to introduce a punitive tax. Also, in 2012, the government restricted the increase in the contracted ASP for government thermal contracts to 5% or less and capped thermal coal spot prices at CNY 800/tonne. Yanzhou has tried to reduce its exposure to government contracts in recent years (in 2011, 18% of volumes were government-contracted), although its high exposure to spot prices led to significant pressure on profitability in 2012. The Australian government introduced the 22.5% Minerals Resources Rent Tax in H1- 2012, which will affect YA‟s profitability. Moderate financial metrics: Yanzhou has consistently posted positive RCF since 2005, and its return on capital was a high 17.8% in 2011. However, large investments and acquisitions in recent years have been largely debt-funded, and debt/capital rose to 44.8% in H1-2012 from 1% in 2008. In Q3-2012, Yanzhou posted a net loss of CNY 80mn (versus a net profit of CNY 1.1bn in Q3-2011) due to coal- price declines and cost pressures in Australia. Yanzhou has set a target to increase coal production to 150mt by 2015, which appears difficult to achieve. We expect the company to spend c.CNY 20bn in 2012-13 (CNY 3bn in H1-2012) to bring its recently acquired mines into production. This, combined with cost pressures, will keep leverage elevated at 3.2-3.5x in 2013 (3.3x in H1-2012); any sharp decline in coal prices will put pressure on Yanzhou‟s ratings. Linkage with Shandong government: Yanzhou is among the largest SOEs in Shandong and accounts for more than 10% of provincial SOEs‟ revenue and assets. It will also play an important role in the consolidation of China‟s coal sector. Its government linkage has helped it expand in other provinces, and it enjoys strong access to the local bank and bond markets.
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Credit Alert
Figure 90: Saleable coal production (mt) Figure 91: Sales by region (CNY bn) 60 China Japan South Korea Australia Others China Australia 50 50 40 40 30 30 20 20
10 10
0 0 2007 2008 2009 2010 2011 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 92: Capex split (CNY bn) Figure 93: Debt metrics (CNY bn – LHS, % – RHS)
Company Shanxi Nenghua Yulin Nenghua 40 60 Debt 15 Heze Nenghua Hua Ju Energy Ordos Neng Hua 35 Debt/capital (RHS) 50 30 40 10 25 Total 20 cash 30 15 5 20 10 10 5 0 0 0 2011 2012B 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 94: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 24,903 20,677 33,944 47,066 28,286 EBITDA 9,799 7,150 12,744 15,205 5,814 Gross interest expense (38) (45) (603) (839) (775) Profit before tax 8,865 5,686 12,477 12,521 5,382 Net income 6,489 4,117 9,281 8,928 5,256 Balance sheet (HKD mn) Cash and equivalents 9,612 12,054 9,424 17,710 22,307 Total assets 32,339 62,433 72,756 97,152 119,242 Total debt 258 21,853 22,194 34,458 38,576 Net debt (9,354) 9,799 12,770 16,748 16,269 Shareholders‟ equity 26,817 29,254 37,438 43,325 47,508 Cash flow (HKD mn) Net operating cash flow 6,813 6,334 5,208 17,631 6,291 Capex and investments (2,843) (20,938) (3,870) (18,832) (3,045) Free cash flow 3,970 (14,605) 1,338 (1,201) 3,246 Dividends (836) (2,015) (1,231) (2,904) (0) Key ratios EBITDA growth (%) 74.0 (27.0) 78.2 19.3 (24.2) EBITDA margin (%) 39.3 34.6 37.5 32.3 20.6 Operating ROCE (%) 35.3 13.6 18.0 17.8 9.9 Total debt/capital (%) 1.0 42.8 37.2 44.3 44.8 Total debt/EBITDA (x) 0.0 3.1 1.7 2.3 3.3 Net debt/EBITDA (x) NM 1.4 1.0 1.1 1.4 RCF/debt (%) NM 16.9 43.4 31.7 16.3 EBITDA/interest (x) 255.4 158.5 21.1 18.1 7.5
Sources: Company reports, Standard Chartered Research
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Credit Alert
China Metallurgical Group Corp. Bharat Shettigar, +65 6596 8251 China Metallurgical Group Corp. (CMGC) is primarily an engineering and [email protected] construction (E&C) company, with a dominant position in domestic steel plant construction. The E&C segment accounts for over 73% of its revenue, while other businesses include resources, equipment manufacturing, paper making and property development. CMCG raised USD 5.13bn in 2009 by listing its core operating subsidiary, Metallurgical Corp. of China (MCC), which accounts for around 90% of assets and revenue, on the Shanghai and Hong Kong Stock Exchanges. CMGC currently owns 64.18% of MCC. CMGC is 100% owned by the Chinese government through the State Council, and its 2011 revenue of c.USD 37.6bn places it among the top E&C companies globally.
Credit outlook – Negative We maintain our Negative credit outlook on CMGC. The company‟s dominant position and healthy order backlog in metallurgical projects provide strong earnings visibility. However, non-metallurgical projects have stretched its working capital requirements. Separately, its overseas mining projects carry high execution risks and will require large investments in the next few years. As a result, leverage metrics are unlikely to improve in 2013, and if the company is unable to post free cash flow in the next couple of quarters, we see a high likelihood of a downgrade to non-investment grade. That said, CMGC‟s government linkage and funding support from state-owned banks act as positives for the credit.
Figure 95: Company structure
SASAC
100% Baosteel Group (0.7%) social security fund (1.8%), China Metallurgical Group Corp. public shareholders (33.3%) (PRC)
64.2%
35.8% Metallurgical Paper Other Corporation of USD Notes Guarantee making subsidiaries China Ltd. (PRC)
100% Engineering Equipment Resources Property MCC Holding (HK) and Manufacturing Development Development Corp. Ltd. 100.0% Construction (Hong Kong)
Various Various Various Various MCC Paper subsidiaries subsidiaries subsidiaries subsidiaries Group Co. Ltd.
Sources: Company reports, Standard Chartered Research
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Credit Alert
Key credit considerations Dominant position in metallurgical E&C: CMGC has been involved in the design and construction of nearly all medium-sized and large steel plants in China for over 60 years. Its reputation is based on strong technological capabilities, long-standing customer relationships and an ability to meet regulatory requirements. China‟s status as the world‟s largest steel producer helps underpin CMGC‟s business profile. That said, new capacity additions have peaked, and new investment will mainly be in facility upgrades and environmental improvement projects. Non-metallurgical projects carry higher risks: CMGC has also diversified into transportation, infrastructure and social-housing projects. Non-metallurgical projects grew to 52% of E&C revenue in 2011 (32.4% in 2008). However, many of these projects are based on build-transfer (BT) contracts, for which CMGC needs to provide upfront funding (it receives advance and progress payments for metallurgical projects). Also, a large portion of non-metallurgical projects are from municipal governments. Given their poor financial health, some local governments pay CMGC through land-use rights and utility concessions, which has increased its working- capital requirement and stretched its balance sheet. In H1-2012, while the E&C segment‟s EBITDA margin improved to 5.4% (4.6% in full-year 2011), the value of new contracts signed declined 25% y/y to CNY 123.6bn due to the slowdown in China‟s steel industry and overall fixed-asset investments. Other businesses: CMGC has invested in domestic and overseas mining assets as part of the government‟s strategy to secure metal resources. Its two key projects are the Aynak copper mine in Afghanistan (USD 4.4bn) and the Cape Lambert iron mine in Australia (AUD 3.7bn). CMGC receives strong support from state-owned policy banks, but its mining projects carry high operational and geopolitical risks and have encountered project delays, cost over-runs and asset impairments. We expect 40% of CMGC‟s overall capex in the next two to three years to be on its overseas resources projects. Separately, CMGC‟s equipment manufacturing, property development and paper businesses offer cash-flow diversity, although its track record in these segments is relatively short. In H1-2012, it experienced margin pressure in its equipment manufacturing and property divisions. Leverage unlikely to improve: CMGC‟s EBITDA margin declined in 2011 (5.3% versus 6.1% in 2010) while MCC‟s H1-2012 EBITDA levels declined 3.7% y/y. We expect earnings to remain flat in 2013 due to the slowdown in the E&C segment. CMGC‟s debt has increased materially since 2008 due to high working-capital requirements for social housing and transportation BT projects, and massive investments in overseas resources projects. During 2009-11, while EBITDA grew 25%, debt increased 62% to CNY 148bn. The MCC IPO helped to improve balance- sheet strength, although CMGC‟s debt/capital (71%) and leverage (11.4x) remain very high for its rating category. We expect CMGC to generate CNY 7-8bn of FFO in 2013. The company cut its 2012 capex to CNY 7-8bn (from CNY 10.7bn in 2011), and if it is able to narrow its working-capital deficit (CNY 24.7bn in 2011), it may be able to post marginal free cash flow. If not, we see a high likelihood of the company being downgraded to non-investment grade in 2013. That said, CMGC‟s liquidity is adequate given its CNY 48bn of cash and CNY 286bn of uncommitted standby facilities as of end-2011. Sovereign linkage: CMGC plays a big role in enhancing the competitiveness of China‟s steel industry, developing low-income housing and investing in overseas mining assets. While it operates in competitive industries and its strategic importance is moderate, it has received funding support from state-owned banks and CNY 3bn in government subsidies and capital injections since 2008.
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Credit Alert
Figure 96: MCC’s revenue by segment (CNY bn) Figure 97: MCC’s gross profit by segment (CNY bn)
250 E&C Equipment mfg. Resources dev. Real estate Others 12 E&C Equipment mfg. Resources dev. Real estate Others 10 200 8
150 6 4 100 2 0 50 -2 0 -4 2009 2010 2011 H1-2012 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 98: MCC’s borrowing profile (CNY bn) Figure 99: MCC’s capex breakdown (CNY bn) 100 E&C Equipment mfg. Resources dev. Real estate Others 16
80 14 12 60 10 8 40 6 4 20 2 0 0 <1Y 1-2Y 2-5Y >5Y 2008 2009 2010 2011 H1-2012 Sources: Company reports, Standard Chartered Research Sources: Company reports, Standard Chartered Research
Figure 100: Summary financials 2009 2010 2011 2011* H1-12* Income statement (CNY mn) Revenue 176,612 217,131 243,166 229,721 106,845 EBITDA 10,365 13,238 12,993 10,102 5,178 Gross interest expense (4,919) (5,812) (8,264) (7,134) (4,816) Profit before tax 5,694 5,844 510 6,683 717 Net income 2,982 2,010 (2,583) 4,243 (186) Balance sheet (CNY mn) Cash and equivalents 53,985 43,548 47,828 42,721 33,606 Total assets 264,333 318,063 360,199 332,031 348,172 Total debt 91,505 113,196 148,362 137,161 143,481 Net debt 37,519 69,648 100,534 94,440 109,875 Shareholders‟ equity 55,853 61,076 60,464 58,175 57,778 Cash flow (CNY mn) Net operating cash flow (10,391) (30,626) (18,377) (19,203) (13,049) Capex and investments (14,727) (13,785) (10,731) (10,169) (2,579) Free cash flow (25,118) (44,411) (29,108) (29,372) (15,628) Dividends (469) (333) (737) (1,251) (103) Key ratios EBITDA growth (%) NA 27.7 (1.9) (13.2) (3.7) EBITDA margin (%) 5.9 6.1 5.3 4.4 4.8 Operating ROCE (%) NA 6.4 4.9 4.4 3.8 Total debt/capital (%) 62.1 65.0 71.0 74.0 74.9 Total debt/EBITDA (x) 8.8 8.6 11.4 13.6 13.9 Net debt/EBITDA (x) 3.6 5.3 7.7 9.3 10.6 RCF/debt (%) 7.9 7.0 4.3 NA NA EBITDA/interest (x) 2.1 2.3 1.6 1.4 1.1
*Data pertains to MCC; Sources: Company reports, Standard Chartered Research
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Credit Alert
CITIC Pacific Ltd.
Bharat Shettigar, +65 6596 8251 CITIC Pacific Ltd. (CitPac) is a Hong Kong-listed conglomerate. Its core businesses [email protected] include special-steel manufacturing, iron ore mining and processing, and property development in China. These businesses accounted for c.70% of CitPac‟s assets as of June 2012. Its other business interests comprise power generation, a coal mine, harbour tunnels (eastern and western cross-harbour tunnels in Hong Kong), telecoms (CITIC Telecom), trading (Dah Chong Hong), and logistics services. CitPac was one of the first Chinese companies to list and invest outside China. It is currently 57.6% held by CITIC Group, which is wholly owned by the State Council of the Chinese government.
Credit outlook – Negative We maintain our Negative credit outlook on CitPac. Delays and cost over-runs in the Sino Iron project and aggressive investments in other businesses since 2007 have led to a serious deterioration in the company‟s balance sheet. While the steel and property businesses generate relatively steady earnings and overall capex is peaking, we do not expect the company to post free cash flow in 2013. Hence, leverage will remain high. CITIC Group‟s ownership and potential asset sales are supportive factors for the credit. However, the overall credit profile is unlikely to stabilise until the company improves its execution capabilities and a few lines of the Sino Iron project ramp up and start generating cash flow.
Figure 101: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 46,420 46,409 70,614 100,086 49,919 EBITDA 5,289 4,841 6,026 8,461 3,758 Gross interest expense (1,880) (2,528) (3,208) (4,173) (2,370) Profit before tax (12,332) 7,926 12,410 13,543 7,178 Net income (12,662) 5,950 8,893 9,233 5,482 Balance sheet (HKD mn) Cash and equivalents 18,117 21,303 24,237 30,930 35,607 Total assets 139,184 155,741 193,169 229,739 246,321 Total debt 57,234 65,675 83,683 98,707 112,436 Net debt 39,117 44,372 59,446 67,777 76,829 Shareholders‟ equity 56,007 65,239 74,218 88,013 90,621 Cash flow (HKD mn) Net operating cash flow 3,290 1,793 3,302 2,841 (498) Capex and investments (20,176) (17,393) (22,576) (17,978) (10,926) Free cash flow (16,886) (15,600) (19,274) (15,137) (11,424) Dividends (2,415) (547) (1,459) (1,872) (1,095) Key ratios EBITDA growth (%) 7.0 (8.5) 24.5 40.4 (17.6) EBITDA margin (%) 11.4 10.4 8.5 8.5 7.5 Total debt/capital (%) 53.4 52.2 55.0 54.9 55.4 Total debt/EBITDA (x) 10.8 13.6 13.9 11.7 14.7 Net debt/EBITDA (x) 7.4 9.2 9.9 8.0 10.0 EBITDA/interest (x) 2.8 1.9 1.9 2.0 1.6
Sources: Company reports, Standard Chartered Research
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Credit Alert
Franshion Properties (China) Ltd.
Feng Zhi Wei, +65 6596 8248 Established in Hong Kong in 2004 and listed on the HKSE in 2007, Franshion [email protected] Properties China Ltd. (Franshion) is c.63% owned by the Sinochem Group, one of the 16 SOEs approved by the SASAC to engage in the real estate business, and one of the six SOEs approved by the SASAC for hotel operations. Franshion has three major business segments: property development, property leasing and hotel operations. As of June 2012, it held (1) a development portfolio of about 3.7mn sqm, including eight projects under development and two held for future development, (2) 371,891 sqm of investment property from three office buildings, and (3) 2,872 guest rooms from six hotels (408,871 sqm). The company is also involved in primary land development in Changsha (8.48mn sqm).
Credit outlook – Stable Our Stable credit view on Franshion is backed by its high-quality investment assets that generate stable recurring revenue of more than HKD 3bn p.a. and its track record of prudent financial management. On the other hand, revenue from property sales will likely remain volatile given its small development land bank with a limited number of projects. This sometimes affects its credit ratios negatively when sales revenue recognition is low. However, liquidity is strong. In addition to the HKD 10.6bn of free cash and HKD 10.9bn of unused bank facilities as of June 2012, Franshion issued USD 500mn 4.7% of 2017 bonds in October, mainly for refinancing. This was against short-term debt of HKD 9.3bn.
Figure 102: Summary financials 2009 2010 2011 H1-11 H1-12 Income statement (HKD mn) Revenue 6,321 6,348 6,592 1,848 3,618 EBITDA 2,709 2,616 2,641 758 1,577 Gross interest expense (704) (932) (1,372) (629) (865) Profit before tax 2,474 3,064 4,097 2,327 2,489 Net income 1,174 1,714 2,344 1,640 1,603 Balance sheet (HKD mn) Cash and equivalents 3,523 11,230 12,224 13,649 10,570 Total assets 40,143 51,355 69,771 72,379 76,914 Total debt 16,512 18,235 25,199 30,836 26,915 Net debt 12,989 7,006 12,976 17,187 16,345 Shareholders‟ equity 17,947 26,719 30,547 28,650 31,907 Cash flow (HKD mn) Net operating cash flow (3,830) 928 (7,713) NA NA Capex and investments (184) (139) (225) NA NA Free cash flow (4,014) 788 (7,938) NA NA Dividends (370) (229) (846) NA NA Key ratios EBITDA growth (%) 59.6 (3.4) (1.0) (56.5) (108.1) EBITDA margin (%) 42.9 41.2 40.1 41.0 43.6 Total debt/capital (%) 47.9 40.6 45.2 51.8 45.8 Total debt/EBITDA (x) 6.1 7.0 9.5 18.9 7.8 EBITDA/interest (x) 3.8 2.8 1.9 1.2 1.8 Total cash/ST debt (%) 33.1 149.2 202.8 85.9 113.7
Sources: Company reports, Standard Chartered Research
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Credit Alert
China COSCO Holdings Co. Ltd.
Bharat Shettigar, +65 6596 8251 China COSCO Holdings Co. Ltd. (China COSCO) was established in 2005 as the [email protected] listed flagship subsidiary of the COSCO Group, which is the largest integrated shipping company in China and is among the largest in the world. It offers marine transportation services including container shipping, dry bulk shipping, logistics services, freight forwarding, and terminal and container leasing services through various subsidiaries. As of June 2012, it reported the world‟s fourth-largest container capacity (a fleet of 166 container vessels with a capacity of 741,687 TEUs) and the world‟s largest bulk cargo fleet (357 dry bulk vessels with a capacity of 32.4mn DWT). It also has a 42.7% stake in COSCO Pacific, which is the world‟s fifth-largest container terminal operator (95 berths in 19 ports) and the third-largest container leasing service provider (with its 1,797,377 TEUs). China COSCO is headquartered in Beijing and is listed in Hong Kong and Shanghai. It is 52.8% owned by COSCO Group, which is under the direct administration of SASAC.
Credit outlook – Not applicable Please note that we do not have formal credit research coverage of China COSCO.
Figure 103: Summary financials 2008 2009 2010 2011 H1-12 Income statement (CNY mn) Revenue 131,839 55,212 96,488 84,639 34,424 EBITDA 21,073 (3,784) 9,956 (8,725) (1,898) Gross interest expense (970) (1,113) (1,273) (1,668) (1,126) Profit before tax 15,671 (6,313) 9,210 (7,854) (3,721) Net income 11,606 (7,540) 6,785 (10,495) (4,872) Balance sheet (CNY mn) Cash and equivalents 31,827 44,198 46,683 46,963 41,818 Total assets 120,010 138,620 150,982 157,459 158,137 Total debt 26,966 60,458 61,628 78,409 80,453 Net debt (4,861) 16,260 14,945 31,446 38,634 Shareholders‟ equity 61,906 53,393 62,301 50,170 45,971 Cash flow (CNY mn) Net operating cash flow 25,711 (6,302) 10,535 (5,427) (3,215) Capex and investments (18,553) (11,182) (8,504) (8,565) (4,901) Free cash flow 7,158 (17,485) 2,031 (13,992) (8,116) Dividends (1,804) (2,893) 0 (919) 0 Key ratios EBITDA growth (%) (11.8) NM NM NM NM EBITDA margin (%) 16.0 (6.9) 10.3 (10.3) (5.5) Total debt/capital (%) 30.3 53.1 49.7 61.0 63.6 Total debt/EBITDA (x) 1.3 NM 6.2 NM NM Net debt/EBITDA (x) NM NM 1.5 NM NM EBITDA/interest (x) 21.7 NM 7.8 NM NM
Sources: Company reports, Standard Chartered Research
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Credit Alert
China Resources Cement Holdings Ltd.
Bharat Shettigar, +65 6596 8251 China Resources Cement Holdings Ltd. (CR Cement) is a leading cement and [email protected] concrete producer in China. Its operations range from the excavation of limestone to the production, sale and distribution of cement products. As of June 2012, it had a total of 39 clinker production lines (annual capacity of 48.8mt) and 85 cement grinding lines (annual capacity of 70.7mt), and operated 54 concrete batching plants (annual capacity of 32mcm). CR Cement sells its cement under the Runfeng, Hongshuihe and Haidao trademarks, and has strong market positions in Guangdong, Guangxi, Fujian, Hainan, Shanxi, Yunnan and Hong Kong. The company is 73.3% owned by China Resources (Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by China‟s State Council through China Resources National Corporation.
Credit outlook – Not applicable Please note that we do not have formal credit research coverage of CR Cement.
Figure 104: Summary financials 2008 2009 2010 2011 H1-12 Income statement (HKD mn) Revenue 5,781 6,907 14,142 23,240 11,034 EBITDA 1,029 1,600 3,308 6,219 1,987 Gross interest expense (124) (149) (268) (668) (392) Profit before tax 823 1,054 2,231 4,906 790 Net income 761 1,010 2,041 4,179 635 Balance sheet (HKD mn) Cash and equivalents 364 5,723 4,115 3,738 2,475 Total assets 10,693 24,234 35,328 50,458 50,372 Total debt 4,498 9,378 13,243 21,416 23,546 Net debt 4,134 3,655 9,128 17,679 21,071 Shareholders‟ equity 4,401 12,631 15,245 19,901 20,011 Cash flow (HKD mn) Net operating cash flow 1,058 1,080 3,194 5,221 446 Capex and investments (2,677) (5,601) (7,815) (7,381) (1,878) Free cash flow (1,618) (4,521) (4,622) (2,159) (1,432) Dividends (46) 0 0 (619) (391) Key ratios EBITDA growth (%) 33.9 55.5 106.7 88.0 (33.3) EBITDA margin (%) 17.8 23.2 23.4 26.8 18.0 Total debt/capital (%) 50.5 42.6 46.5 51.8 54.1 Total debt/EBITDA (x) 4.4 5.9 4.0 3.4 5.9 Net debt/EBITDA (x) 4.0 2.3 2.8 2.8 5.3 EBITDA/interest (x) 8.3 10.7 12.3 9.3 5.1
Sources: Company reports, Standard Chartered Research
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Credit Alert
China Longyuan Power Group Corp. Ltd.
Bharat Shettigar, +65 6596 8251 China Longyuan Power Group Corp. Ltd. (Longyuan) is the largest wind power [email protected] generation company in China and the second largest in the world in terms of installed capacity. The company designs, develops and operates wind farms, and sells the electricity generated to local power grid companies. As of June 2012, it had 8,994MW of wind power capacity spread over 18 provinces and 1,875MW of coal and 240MW of other renewable capacity. In 2002, it became a subsidiary of China Guodian Corp. (Guodian), which is one of China‟s five largest power-generating companies and is 100% owned by SASAC. Longyuan was listed in Hong Kong in 2009 and is currently 63.7% owned by Guodian.
Credit outlook – Not applicable Please note that we do not have formal credit research coverage of Longyuan.
Figure 105: Summary financials 2008 2009 2010 2011 H1-12 Income statement (CNY mn) Revenue 8,555 9,744 14,218 16,159 8,435 EBITDA 3,441 5,452 6,179 7,749 4,245 Gross interest expense (932) (1,024) (1,088) (1,677) (1,214) Profit before tax 616 1,944 3,200 3,609 1,988 Net income 337 894 2,013 2,638 1,460 Balance sheet (CNY mn) Cash and equivalents 1,002 16,501 4,081 3,295 3,799 Total assets 36,049 67,954 74,675 90,107 97,608 Total debt 24,771 34,869 38,135 48,567 55,978 Net debt 23,769 18,369 34,055 45,272 52,179 Shareholders‟ equity 7,073 25,680 27,425 29,866 30,666 Cash flow (CNY mn) Net operating cash flow 1,865 2,580 2,792 3,814 NA Capex and investments (12,382) (16,184) (17,846) (13,048) NA Free cash flow (10,517) (13,604) (15,054) (9,234) NA Dividends 0 0 (632) (403) NA Key ratios EBITDA growth (%) 49.5 58.5 13.3 25.4 (24.1) EBITDA margin (%) 40.2 56.0 43.5 48.0 50.3 Total debt/capital (%) 77.8 57.6 58.2 61.9 64.6 Total debt/EBITDA (x) 7.2 6.4 6.2 6.3 6.6 Net debt/EBITDA (x) 6.9 3.4 5.5 5.8 6.1 EBITDA/interest (x) 3.7 5.3 5.7 4.6 3.5
Sources: Company reports, Standard Chartered Research
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Credit Alert
Glossary of abbreviations bcm billion cubic metres boe barrels of oil equivalent DWT dead-weight tonnage E&P exploration and production FCF free cash flow GFA gross floor area HKSE Hong Kong Stock Exchange kboed thousand barrels of oil equivalent kWh kilowatt hours mcm million cubic metres mmboe million barrels of oil equivalent mmboed million barrels of oil equivalent per day mt million tonnes mtpa million tonnes per annum MW megawatts MWh megawatt hours PSC production-sharing contracts psm per square metre RCF retained cash flow SASAC State-owned Assets Supervision and Administration Commission SOE state-owned enterprise sqm square metres SSE Shanghai Stock Exchange ST short-term TEU twenty-foot equivalent unit USD USD dollar
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Disclosures Appendix
Recommendations structure Standard Chartered terminology Impact Definition Positive Improve Issuer – We expect the fundamental credit profile of the Stable Remain stable Credit outlook issuer to
Apart from trade ideas described below, Standard Chartered Research no longer offers specific bond and CDS recommendations. Any previously-offered recommendations on instruments are withdrawn forthwith and should not be relied upon.
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may or may not include price targets.
Credit trend distribution (as at 09 January 2013) Coverage total (IB%) Positive 9 (22.2%) Stable 178 (25.4%) Negative 83 (0.0%) Total (IB%) 270 (27.8%)
Credit trend history (past 12 months) Company Date Credit outlook - - -
Please see the individual company reports for credit trend history
Regulatory Disclosure: Subject companies: Beijing Enterprises Holdings Ltd., China Merchants Holdings (International) Co. Ltd., China Metallurgical Group Corp., China National Petroleum Corp., China Oilfield Services Ltd., China Petrochemical Corp., China Resources Gas Group Ltd., China Resources Power Holdings Co. Ltd., CITIC Pacific Ltd., CNOOC Ltd., Shenzhen International Holdings Ltd., Sinochem Hong Kong (Group) Co. Ltd., Yanzhou Coal Mining Co. Ltd., China Overseas Land & Investment Ltd., China Resources Land Ltd., Franshion Properties China Ltd., China COSCO Holdings Co. Ltd., China Resources Cement Holdings Ltd., China Longyuan Power Group Corp. Ltd.
Standard Chartered Bank and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year: Beijing Enterprises Holdings Ltd., China Merchants Holdings (International) Co. Ltd., China Resources Gas Group Ltd., CITIC Pacific Ltd., Franshion Properties China Ltd.
Standard Chartered Bank and/or its affiliates owns 1% or more of any class of common equity securities of this company: China Petrochemical Corp.
Standard Chartered Bank makes a market in securities issued by this company: China Petrochemical Corp., CITIC Pacific Ltd., CNOOC Ltd., Yanzhou Coal Mining Co. Ltd., China Overseas Land & Investment Ltd., China COSCO Holdings Co. Ltd.
Standard Chartered Bank was a lead manager of a public offering for this company within the past 12 months, for which it received fees: China Resources Gas Group Ltd.
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Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
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Document approved by Data available as of Document is released at Kaushik Rudra 05:45 GMT 14 January 2013 05:45 GMT 14 January 2013 Global Head of Credit Research
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