Xinhua Far East Downgrades Issuer Rating of Hangzhou Iron & Steel to BBB-; Outlook Stable

Xinhua Far East Downgrades Issuer Rating of Hangzhou 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 Hangzhou Iron & Steel Co., Ltd. (`HZIS' or
`the Company', SH A 600126) from BBB to BBB-; the Company's
rating outlook remains stable.

    The rating action was prompted by Xinhua Far East's
assessment that HZIS is unable to increase production
capacity under tightening environmental regulations and
consolidation in China's steel sector. For small and
low-end steelmakers such as HZIS, the competitive landscape
is set to become even more challenging, given high raw
material costs, market overcapacity, weakened demand under
government macro-controls and possible export rebate
reduction. HZIS's output, comprising of low value-added
long products, has stagnated in recent years despite
increasing capex. Although Xinhua Far East expects its
profit margin to increase marginally in 2Q06, it has been
on a downward trend and is expected to remain at low
levels.

    Despite HZIS' limited production capacity and
concentration on long products, out of environmental
concerns, the local government has prevented it from
investing further in capacity expansion. As a result, HZIS'
production has been sluggish, remaining under three million
tons for low-end long products, which include profiled
steel, strip steel, steel rods and wire rods.

    Structural imbalances in China's steel industry have
created overcapacity in such low value-added products,
thwarting the ability of steelmakers to sustain long-term
development without upgrades to more high-value added flat
products. 

    HZIS' profitability has consequently been squeezed,
primarily out of long product oversupply. Its profit margin
and EBIT margin declined from 13.6% and 10.7% in 2004 to
6.1% and 3.9% in 2005 respectively, and further to 4.59%
and 2.35% in 1Q06. Although the Company's profit margin is
expected to rise slightly in the 2Q06 -- the result of
lower production costs and higher product prices - it still
faces considerable pressures, with elevated raw material
costs and product prices impacted negatively by
macro-controls and market overcapacity. The possibility of
an export rebate reduction could also increase domestic
supply and put further pressure on steel prices.

    At the same time, HZIS is required to upgrade its
production facilities to meet Hangzhou city's stricter
environmental protection standards. In 2005, it spent about
RMB1.1 billion in upgrade projects, of which more than
RMB138 million was used for environmental protection
purposes. In order to finance these projects, the company
increased its short-term debt sharply to RMB2.02 billion in
2005 from RMB473.5 million in 2004. As a result, its gross
debt to total capital ratio rose to 37.0% from 13.4%.

    In addition, the progress of HZIS' diversification into
non-steel industries since listing in 1998 has been
sluggish. Its non-steel turnover contributed less than 5%
of the total in 2005. 

    On the other hand, there is the possibility that HZIS
could be the acquisition target of a large steel group or
obtain an asset injection from its major shareholder,
Hangzhou Iron & Steel Group, but Xinhua Far East views
these as unlikely in the near term. Xinhua Far East also
notes HZIS' sound operational and geographic advantages
that allow it easy access to both its booming local market
and neighboring markets in eastern China. 

    Located in the tourist city of Hangzhou and targeting
markets in eastern China, HZIS produced 2.79 million tons
of steel products in 2005, mainly consisting of low-end
long products, which include profiled steel, strip steel,
steel rods and wire rods.

    HZIS is also a constituent of the Xinhua FTSE 400 Index
and, as of market close on July 18, 2006, its total market
capitalization and investable capitalization were RMB2,420
million and RMB726 million respectively. 

    For the rating report summary, please visit
http://www.xinhuafinance.com/creditrating .

    Note to Editors:

    About Xinhua FTSE 400 Index

    Xinhua FTSE 400 Index is the mid cap benchmark index in
the Xinhua FTSE A Index Series, which includes the 400
companies in China after the top 200, ranked by market
capitalisation.

    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:   [phone]
            [phone]
            [phone]
     Email: [e-mail]

    US
     Taylor Rafferty (IR/PR Contact in US)
     Ms. Ishviene Arora
     Tel:   [phone]
     Email: [e-mail]

SOURCE  Xinhua Far East China Ratings