HONG KONG, 29 April 2020. Pengyuan International has affirmed Aluminium Corporation of China Limited (Chalco)’s global scale long-term issuer credit rating (LTICR) of ‘BBB+’. The outlook is stable. The rating is based on a standalone credit profile (SACP) of ‘bb-’ and our assessment that its parent Aluminum Corporation of China (Chinalco) has an extremely strong willingness to provide support in the event of financial distress. Chinalco is 100% owned by the Chinese central government, making it a state-owned enterprise (SOE), and its credit profile is linked to the creditworthiness of China’s central government (AA/stable). Chalco’s rating is further underpinned by its leading market position in China’s aluminium industry. The rating is constrained by a weak profitability position compared to industry peers and persistent high leverage.
The stable outlook for Chalco reflects Pengyuan International’s expectation that Chalco will continue to receive strong support from its parent company and that the company will maintain its leading market position whilst improving efficiencies to weather through market difficulties.
KEY RATING RATIONALES
Continuous support from the parent group. Chalco is 32.06% owned by Chinalco, which is in turn wholly owned by the State-Owned Assets Supervision and Administration Commission (SASAC), the Chinese government agency overseeing SOEs. As the top alumina, aluminium and copper-mining and manufacturing company in China, Chinalco has strategic importance for the Chinese government. It is the key vehicle used through which the Chinese government acquires overseas mining resources and consolidates domestic metals and mining companies. Chinalco receives government support in the form of subsidies, tax rebates, and direct asset injections. Chalco owns and operates most of the alumina and aluminium business of Chinalco. In our view, Chalco is highly integrated with Chinalco and will receive strong support from its parent should the company meet any financial difficulties.
Leading market position maintained. Chalco was the largest alumina and number two aluminium manufacturer based on production volume worldwide in 2019. Despite the slowdown of productivity in 2019, Chalco has maintained its alumina and aluminium market share in China. In 2019, the company produced 13.8 million tonnes of alumina and 3.8 million tonnes of aluminium, accounting for 11% and 6% of alumina and aluminium production in China respectively.
Capacity optimization to improve efficiencies. In 2019, Chalco improved its internal optimisation, which strengthened its competitive advantage within the industry. The company shut down two inefficient and uncompetitive smelters and ramped up four new ones. Though the capacity switch may cause lower profitability in the short term, we believe Chalco’s efforts to reduce costs and improve business integration will enable it to strengthen its competitive edge and outperform its competitors when industry fundamentals improve, which we expect to occur in 2022. We expect aluminium prices to face persistent demand challenges in 2020 as a result of the impact of the COVID-19 outbreak.
Weak profitability. During the downcycle experienced by the aluminium industry, Chalco’s EBITDA margin found its bottom in 2014 and has then gradually recovered since 2015. Even though the company’s profitability is still currently weak, we expect its EBITDA margins to remain somewhat stable at around 7-9% over the next three years. We further expect the company to continue its focus on the primary aluminium and commodity-trading business sectors and will in particular aim to develop more high-purity alumina and aluminium products. However, we believe the company’s single-digit profitability levels will not likely increase substantially in the near term given an overall weakened industry environment and increasing pressure on the price of raw materials.
Persistently high leverage. We expect the company will continue its deleveraging process at a moderate pace, with the aim of maintaining a 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 levels witnessed in 2017 due to escalated acquisitions. We still expect the company will aim to deleverage and maintain a more optimal debt structure in the next three years, thanks to the lower capex and acquisitions. Overall leverage will nevertheless remain relatively high.
The stable outlook for Chalco reflects Pengyuan International’s expectation that Chalco will continue to maintain its leading position within China’s aluminium industry. We expect the company will continue to receive strong support from its parent, Chinalco.
We would consider downgrading Chalco’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) a significant deterioration of the credit profile of the parent Chinalco over a prolonged period; 2) substantially weakened ties between Chalco and Chinalco; and 3) a substantial deterioration of the company’s financial profile.
We would consider upgrading the company’s issuer credit rating should its credit profile improve substantially, which could be caused by: 1) a substantial improvement of the credit profile of the parent Chinalco over a sustained period; 2) strengthened importance of Chalco’s business to the parent company; 3) a substantial improvement of the company’s financial profile.
Note: Ratings mentioned in this press release are unsolicited ratings.
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Date of Relevant Rating Committee: 20 April 2020
Additional information is available on www.pyrating.com
General Corporate Rating Criteria (15 March 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
Government-Related Entities Rating Criteria (31 August 2018)
Unsolicited ratings – non-participative rating – not disclosed
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