2007'02.04.Sun
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: +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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