2007'02.04.Sun
Xinhua Far East Downgrades Anyang Iron & Steel to BBB-; Outlook Stable

July 19, 2006

HONG KONG, July 19 /Xinhua-PRNewswire/ -- Xinhua Far East China Ratings today downgraded the issuer credit rating of Anyang Iron & Steel Co., Ltd. ("AYIS" or "the Company", SH A 600569) from BBB to BBB-; the Company's rating outlook remains stable. The rating action incorporates Xinhua Far East's view that the nearly three-year delay in AYIS' new construction project has hindered its production expansion and weakened its industry position, with forecasted project returns now overshadowed by an abundance of complementary products in the market. Xinhua Far East is also concerned about the Company's financial management and information disclosure following the embezzlement by its brokerage of government bonds that AYIS had purchased. The downgrade also reflects the company's rising gearing ratio and falling profit margins in the continuously challenging market. AYIS had planned to increase its high-end production capacity to enhance its product mix as early as 2001; however, this project had been postponed due to archaeological issues. Although AYIS' new production project (able to produce 1.1 million tons of hot-rolled steel sheet/coil annually) was 90%-complete by the end of 2005, the number of competing products in China's market has already risen substantially, restricting the margins AYIS will be able to place on new products. One key issue affecting the Company involves RMB180 million of unused project funds that were used by AYIS to buy government bonds in 2002 and were subsequently embezzled by its brokerage firm. While the matter is still under investigation, it is uncertain whether the funds will be recovered. AYIS made a RMB54 million provision in 2005 for failed investment but, if the funds are not returned in 2006, the Company will have to make a second provision for the remaining RMB126 million. This would negatively affect its net profit. Importantly, this incident has revealed inadequacies in the Company's financial management and risk control practices. Given that the Company did not disclose details of the matter until the end of 2005 -- much later than the actual embezzlement -- its information disclosure practices are clearly in need of improvement. Another issue affecting the Company is the sharp rise in capital expenditures in 2005, with its net cash outflow from investing activities totalling RMB 3.2 billion, compared with net cash inflow from operations of RMB 627 million. The Company has had to rely on external financing to a great extent, thus causing its gross debt to total capital ratio to rise sharply to 32.4% in 2005 from 7.2% in 2004. Under the adverse operating environment in 2005, AYIS' profitability also declined sharply, with gross margin and EBIT margin declining to 7.7% and 3.7% respectively from 12.3% and 7.9% in 2004. As new capacity is unlikely to substantially enhance profitability in a market characterized by oversuppy, Xinhua Far East has decided to downgrade AYIS' rating to BBB- from BBB. A major steel producer in Henan province, AYIS produced 4.48 million tons of steel products in 2005, of which nearly 60% consisted of low-end long products. AYIS is also a constituent of the Xinhua FTSE China 200 Index and, as of market close on July 18, 2006, its total market capitalization and investable capitalization were RMB4, 642 million and RMB928 million respectively. For the rating report summary, please visit http://www.xinhuafinance.com/creditrating . About Xinhua FTSE China 200 Index Xinhua FTSE China 200 Index is the large cap index in the Xinhua FTSE China A Share Index Series and includes the top 200 companies in China by market cap. It is designed as a tradable index and is calculated in real-time every 15 seconds. For daily data and further information, see http://www.xinhuaftse.com . About Xinhua Far East China Ratings Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003. Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East's rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosures and transparency in China market. For more information, see http://www.xfn.com/creditrating . About Xinhua Finance Limited Xinhua Finance Limited is China's unchallenged leader in financial information and media, and is listed on the Mothers board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial markets and the world, Xinhua Finance serves financial institutions, corporations and re-distributors through four focused and complementary service lines: Indices, Ratings, Financial News and Investor Relations. Founded in November 1999, the Company is headquartered in Shanghai with 20 news bureaus and offices in 19 locations across Asia, Australia, North America and Europe. For more information, please visit http://www.xinhuafinance.com . About Shanghai Far East Credit Rating Co., Ltd Shanghai Far East Credit Rating Co., Ltd. is the first and leading professional credit rating company with comprehensive business coverage in China. It is an independent agency established by the Shanghai Academy of Social Sciences with the mission to develop internationally accepted standards for capital market in China. The company is a pioneer in conducting bond-rating business in China. For years, it has been authorized by the Shanghai branch of the PBOC to undertake loan certificate credit rating. Since establishment, it has rated over 1,000 corporate long-term bonds and commercial papers, based on the principles of objectivity, fairness and independence. The company has also maintained over 50% market share in the loan certificate-rating sector in Shanghai for three consecutive years. With its strong local presence and knowledge, it provides investors with unique and the most insightful credit opinion. For more information, see http://www.fareast-cr.com . For more information, please contact: Hong Kong Joy Tsang Corporate & Investor Communications Director Xinhua Finance Tel: +852-3196-3983 +8621-6113-5999 +852-9486-4364 Email: joy.tsang@xinhuafinance.com US Taylor Rafferty (IR/PR Contact in US) Ms. Ishviene Arora Tel: +1-212-889-4350 Email: ishviene.arora@taylor-rafferty.com SOURCE Xinhua Far East China Ratings
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