OREANDA-NEWS. Shanghai Huayi (Group) Company's (Huayi, BBB-/Negative) credit profile will continue to be constrained by dim prospects for earnings recovery, which was evident in the decline in the chemical company's 2015 results, Fitch Ratings says.

Huayi's 2015 operating results was generally in line with Fitch's expectations, with revenue falling 4% to CNY61,155m and operating EBITDA margin narrowing to 3% from 5% in 2014. However, its 2015 FFO-adjusted net leverage at 4.7x (2014: 4.3x) was better than our forecast of 5.8x.

Leverage continued to rise because of the weaker revenue and operating EBITDA margin amid persistent industry overcapacity, feeble oil prices and weaker economic activity in China. However, the FFO-adjusted net leverage ratio was better than Fitch expected because there was more available cash that stemmed from private secondary offerings by two subsidiaries, capex reduction, longer account payable days and reduced bill receivable days. Huayi's capex dropped 29% in 2015 to CNY1.93bn as it pushed back certain projects. This reflects Huayi's capex flexibility amid the sluggish operating environment.

Fitch downgraded Huayi's rating to 'BBB-' from 'BBB' and assigned a Negative Outlook in November 2015. The company's standalone rating was revised down to 'BB' from 'BB+'. We believe Huayi's linkages to the Shanghai Municipal Government continue to be moderate to strong, and its rating continues to include a two-notch uplift to reflect these ties. The agency will revise the company's Outlook to Stable if its FFO-adjusted net leverage is below 5.0x and operating EBITDA margin exceeds 5% on a sustained basis.