HONG KONG, 26 April 2019. Pengyuan International has assigned a first-time global scale long-term issuer credit rating (LTICR) of ‘BBB+’ to Aluminum Corp. of China Limited (Chalco). The outlook is stable.

The Company’s issuer credit rating is based on a standalone credit profile (SACP) of ‘bb-‘ and our assessment that its parent Aluminum Corporation of China (Chinalco) has very strong willingness to provide extraordinary support in the event of financial distress. Chinalco is 100% held by Chinese central government, making it a state-owned enterprise, thus applicable to government-related entity rating criteria. Chalco’s rating is derived from parent support perspective. Chalco’s rating is supported by very strong willing from its parent company to support, leading market position and abundant liquidity. The rating is constrained by weak profitability position compared to industry peers, and persistent high leverage.

The stable outlook for Chalco reflects Pengyuan International’s expectation that the Company will maintain its current profitability level while working on a more optimal debt structure, improved cash flow and cost control. Also, its parent company has very strong willingness to support on a substantial level.

KEY RATING RATIONALES

Credit Strengths

Strong ties with and continuous support from the parent group. Chinalco is the largest shareholder of the Company, directly holding 36.62% equity interest of Chalco as of the end of 2018. As a 100% state-owned enterprise, Chinalco controls the board and senior management appointment, and therefore it has a strong influence over the Company’s long-term strategies. Both Chinalco and Chalco received government support in the form of subsidies, tax rebates and direct asset injections on a substantial level.

 

Leading market position with vertically integrated business operations. Chalco has continuously reported positive revenue growth after a cyclical down cycle from 2015 to 2018. The Company has a large scale of business operation as revenue stood at RMB 180bn in 2018, maintaining the same level as that of 2017. The revenue growth was mostly driven by the growth of Alumina business, which increased 43.5%, 43.6% and 8% respectively in 2016, 2017 and 2018. The Company has been the largest alumina manufacturer based on production volume in the worldwide, and was the fourth largest aluminum producer globally in 2017. In 2018, its parent Chinalco completed the acquisition of Yunnan Aluminum and the integration of Chalco and Yunnan Aluminum was promised to be completed within five years. After including the synergies of Yunnan Aluminum, the Company is expected to further enhance its electricity price bargaining power and cost control, while strengthening its competition edge in primary aluminum sector.

 

Abundant liquidity supported by bank facilities.The sufficient liquidity of Chalco mainly credits to the abundant bank facilities and relatively rich cash reserves. Up to the end of 2018, the Company signed total bank facilities of RMB 183.1bn, with undrawn facilities of RMB 121.5bn. Majority of banks with which the Company is cooperating are large state-owned banks, policy banks and large-scale joint-stock banks. We believe such bank facilities will stay given the Company’s impact in the industry and government-support background. We reckon that the Company will hold sufficient cash balance and bank facilities to cover its short-term debt balance within one year.

 

Credit Weaknesses

Weak profitability evidenced by below peers EBITDA margin and returns. As the aluminum industry going through the down cycle, Chalco’s EBITDA margin found its bottom in 2014 and then gradually recovered since 2015. Even though the Company’s profitability is still weak at current stage, we expect its EBITDA margins to remain somewhat stable at around 8%-9% over the next three years. For the next three years, we expect the Company to continue its focus on segments as primary aluminum and commodity trading business. Especially, the Company will aim to develop more high-purity alumina and aluminum products. However, we think the Company’s single digit profitability level will not likely increase substantially soon given an overall weakened industry environment and increasing trend of raw materials price.

Persistently high leverage. We expect the Company will continue its deleveraging process on a moderate pace, aiming to maintain more optimal debt structure. Chalco’s leverage decreased after a series of debt for equity swaps. However, the Company’s leverage level witnessed a rebound from its lower level of 2017, due to escalated acquisitions in 2018. We still expect the Company will aim to deleverage and keep a more optimal debt structure in the next three years, credit to less capex and acquisition demand. But overall leverage will maintain a relative high level.

RATING OUTLOOK

The stable outlook for Chalco reflects Pengyuan International’s expectation that Chalco will continue its leading position in China’s aluminum industry. We expect the Company to maintain its current profitability level given the overall balance of industry supply and demand, while working on a more optimal debt structure, improved cash flow and cost control.

We would consider downgrading Chalco’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by 1) significant deterioration of credit profile of the parent Chinalco on a prolonged basis; 2) weakened ties between Chalco and Chinalco substantially; 3) liquidity condition deteriorates substantially.

We would consider upgrading the Company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) substantial improvement of credit profile of the parent Chinalco on a sustained basis; 2) strengthened importance of Chalco’s business to the parent company; 3) substantial improvements of the Company’s financial profile.

Note: ratings mentioned in this press release are unsolicited ratings.


ANALYSTS CONTACT

MEDIA CONTACT

OTHER ENQUIRIES

Primary Analyst

Christine Zhang

+852 3615 8276

christine.zhang@pyrating.com

 

Secondary Analyst

Brian Lam

+852 3615 8339

brian.lam@pyrating.com

 

Committee Chair

Tony Tang

+852 3615 8278

tony.tang@pyrating.com

 

media@pyrating.com

contact@pyrating.com

 

Date of Relevant Rating Committee: 10 April 2019

Additional information is available on www.pyrating.com

Related Criteria

General Corporate Rating Criteria (15 March 2019)

Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

Government-Related Entities Rating Criteria (31 August 2018)


 

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