OREANDA-NEWS. The credit risks for China-based independent industrial gas providers would continue to be high due to weaker order growth and high receivable risk, Fitch Ratings says.

We expect the order growth in both bulk and special industrial gas markets to remain weak. The sluggish steel and chemical sectors in China and industry over-capacity have led to price declines and slower sales volume growth for bulk industrial gases, like liquefied oxygen, carbon dioxide and liquefied nitrogen. Special industrial gases, such as ultra-pure ammonia, which are generally used in the electronics sector, face lower demand due to the weakening LCD panel market globally.

The market share of independent industrial gas providers increased to around 59% in 2014 from 42% in 2008 by revenue. Fitch believes this was primarily driven by the expansion of foreign companies, which tend to have stronger bargaining power due to their leading market positions globally and more advanced technology. These non-Chinese companies have generally outperformed the local gas providers in the Chinese market, and their bargaining power is growing from M&As. For example, Air Liquide in May 2016 completed the acquisition of Airgas to become the world's largest industrial gas supplier by revenue. In addition, the non-Chinese companies have strong business profiles, solid free cash flow generation, low leverage and business stability.

In comparison, the local industrial gas suppliers have much weaker credit profiles, particularly free cash flow generation and leverage positions. This was primarily due to weaker order growth and poor working capital management. Yingde Gases Group Company Limited's (B+/Stable) account receivable days increased to 103 days in 2015 from 89 days in 2014, due to its high reliance on China's steel sector, where profitability in the last few years has been poor due to over-capacity. In 1Q16, a major state-owned company Hangzhou Hangyang Co., Ltd. reported revenue fell 24% yoy, and gross profit margin narrowed to 15.6% from 16.8% a year earlier, and account receivable days surged to 243 days from 175 days at end-2015. Most local companies cut their capex amid the difficult operating environment, but this only partly offsets the deterioration in their working capital burdens and slower top-line growth.