Fitch Ratings has affirmed
The Outlook is Stable.
The rating reflects Hongqiao's position as one of the world's largest aluminium smelters, with a competitive cost base that is supported by high raw-material self-sufficiency. The rating is constrained by limited funding diversification.
The Stable Outlook reflects our expectation that Hongqiao's competitive profitability will allow it to maintain net leverage at a level that is commensurate with its rating, even against our forecast of lower average selling prices for aluminium.
Key Rating Drivers
Stable Margin and Lower Leverage: We expect the EBITDA margin to improve to around 18% in 2023 and remain at similar level in the medium term. High coal prices in 2022 saw the EBITDA margin drop to 16%, from 29% in 2021, as electricity and transportation costs surged. The narrower margin was exacerbated by aluminium prices that had risen by more than 30% in 2021, causing rapid margin expansion. We expect aluminium prices to trend down in 2023 and remain stable in the medium term and for electricity and transportation costs to stabilise.
As a result of the margin squeeze, net debt/EBITDA reached 1.7x in 2022, from 0.5x in 2021. We expect 2023 net leverage to drop to below 1.5x in 2023 as the margin stabilises and to continue to trend down in the medium term.
Large Scale, Self-Sufficient: Hongqiao's large operating scale and vertical integration supports its market-leading profitability. Hongqiao is the world's second-largest primary aluminium producer, with around 6.5 million tonnes of capacity. In 2022, Hongqiao accounted for around 15% and 9% of domestic and global primary aluminum production, respectively. In addition, Hongqiao is fully self-sufficient in bauxite and alumina and had over 55% sufficiency in electricity in 2022.
Limited Diversification Mitigated: Hongqiao has limited product, geographical and customer diversification. However, it is in the midst of migrating around half of its capacity to
Concentrated Funding Profile: Over 60% of total debt of
Key-Man Risk Moderated:
Hongqiao is comparable with the following Fitch-rated peers;
Hongqiao has a less sophisticated product range than
Hongqiao and Chalco have similar aluminium revenue scale. Chalco has lower profitability and similar leverage, but better interest coverage due to its lower funding costs. Chalco's rating also reflects its government-related entity status.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Total aluminum capacity to remain at 6.5 million tonnes
EBITDA margin of around 18% between 2023 and 2026 amid normalised average selling prices, supported by high raw material self-sufficiency
Capex to average at around 6% of revenue between 2023 and 2026 for facility upgrades and relocation
Around 50% dividend pay-out ratio between 2023 and 2026
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Meaningful improvement in maturity profile and funding sources.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA remaining above 2.0x (2022: 1.7x).
Material increase in reliance on short-term financing.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Hongqiao had total debt of
Hongqiao is the world's second-largest primary aluminium producer, with around 6.5 million tonnes of smelting capacity, behind
Hongqiao is a vertically integrated aluminium producer with its own bauxite supply in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
(C) 2023 Electronic News Publishing, source