HONG KONG, 14 January 2021. Pengyuan International has assigned its first-time global scale long-term issuer credit rating (LTICR) of ‘A-’ to Shougang Group Co., Ltd (Shougang). The outlook is stable.
Shougang is the sixth largest steel producer in China and the tenth largest steel producer in the world, measured by crude steel production. Shougang’s issuer credit rating is based on a ‘b+’ standalone credit profile and our assessment that the Beijing government will provide strong support for the Company in the event of a financial distress. Shougang takes the leading role as a diversified public-service provider in accordance with the coordinated development strategy of Beijing-Tianjin-Hebei (Jingjinji), the biggest urbanised megalopolis region in North China with strong backing from the Beijing government. The rating of the Company is constrained by its high leverage due to ongoing capex needs.
Key Rating Drivers
Strong support from the Beijing government. Wholly owned by the Beijing State-Owned Capital Operation and Management Centre and ultimately controlled by the Beijing SASAC, Shougang has a strong linkage to the Beijing government. The Beijing government controls the board and senior management appointment, and has provided capital injection and subsidies over the past few years. Shougang has taken the lead in serving as a diversified public-service provider based on the coordinated development strategy of Beijing-Tianjin-Hebei (Jingjinji) region, undertaking the construction of state-level projects of New Shougang Beijing and Caofeidian economic zone. We expect the Company to continuously receive government support, in the forms of industrial investment fund injection, subsidies and direct capital injection, in light of the importance of the projects to the state.
High business diversification. Shougang has a better business diversification compared to the other steel producers in China, with non-steel related businesses contributed 27% to its revenue in 2019. We expect the Company to further diversify into non-steel related businesses in the next three years, including city infrastructure, real estate and financial service. We expect Shougang’s non-steel related businesses to generate synergies with its core business, which will continue to enhance its competitiveness. In addition, by increasing its business diversification, Shougang has diversified its cash flow and reduced its exposure to the Chinese steel industry’s cyclicality.
Profitability to improve. We expect Shougang’s revenue to grow at 6.1% and 5.5% in 2021 and 2022 respectively, with EBITDA margin improving to 11.4% in 2022 from 10.2% in 2020, thanks to the Company’s expanded steel production capacity, improving utilisation and higher prices in steel products. We expect Shougang’s capacity utilisation to increase to 80% in 2022 from 74% in 2019 with the ramp up of its new capacity in Jingtang production base. Shougang’s steel production capacity increased to 38.4 million tonnes in 2019 from 35.3 million tonnes in 2018, driven by the completion of the one-step project of the second phase of Jingtang Iron & Steel.
China steel demand to pick up. We expect China’s economic recovery to continue to support the recovery of steel industry. Infrastructure and real estate investments are expected to remain robust in 2021, thanks to the economic stimulus backed by the government. In addition, the demand of steel products for automobile and home appliance manufacturing is expected to pick up as domestic consumption increases. We expect Shougang’s cash flows to improve amid the industry recovery.
High leverage driven by ongoing capex needs. We expect Shougang’s leverage to remain high due to its coming debt redemption requirements and ongoing capex needs in the next two to three years. We expect the Company’s capex to remain high in 2021 and 2022, driven by its committed investment in mining, real estate and industrial park projects.
Project investment risks. In our view, Shougang’s investment risks have arisen with its ongoing investments in new projects. The projects of New Shougang Beijing and Caofeidian economic zone have long investment cash cycle and uncertain payoffs, which might influence the profitability and cash flows of the Company.
The stable outlook reflects our view that the Company’s operations will remain stable amid the recovery of China’s economy. The stable outlook on Shougang also reflects the stable outlook on the Beijing government and our expectations that the Beijing government’s willingness to support the Company in the event of financial distress remains unchanged.
We would consider a rating downgrade if 1) substantial evidence shows that the Beijing government’s willingness to support the Company weakens; 2) we downgrade our credit rating of the Beijing government.
We would consider a rating upgrade if we upgrade our credit rating of the Beijing government, given that there is no material change in the Beijing government’s willingness to support.
Note: ratings mentioned above are unsolicited.
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Ke Chen, PHD
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Date of Relevant Rating Committee: 11 January 2021
Additional information is available on www.pyrating.com
Unsolicited ratings – non-participative rating – not disclosed
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