OREANDA-NEWS. Fitch Ratings has affirmed China-based plastic pipes and fittings manufacturer China Lesso Group Holdings Limited's (Lesso) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook is Stable.

The Stable Outlook reflects Fitch's expectation that profitability of Lesso's core plastic pipes business will remain stable while the company will maintain low leverage ratios.

KEY RATING DRIVERS

Stable Profitability, Low Leverage: Revenue increased by 4.0% yoy in 1H16 while overall gross margin increased by 2.7pp to 29.8% from 27.1% in 1H15 (25.8% in 2015) due to a fall in raw material prices. Fitch expects full-year 2016 gross margin to be around 27%, which is similar to that in previous years. Lesso's leverage, measured by funds from operation (FFO)-adjusted net leverage, was 0.1x at end-2015 (0.3x at end-2014), which is very low compared with credits in the 'BB' rating category.

Still Dominant in China: Lesso has maintained its leading position in China's plastic pipes market with 15%-18% share by volume and over 50% share in its home market of southern China at end-1H16. Fitch expects Lesso to continue to dominate the market in southern China while increasing its presence in other regions, such as northern China, as the company recently completed construction of a new production base in the north-eastern province of Shandong.

Sustained FCF Generation: Lesso has consistently recorded positive free cash flow (FCF), driven by strong EBITDA contribution. Lesso was in a net cash position as of end-1H16 and Fitch expects the company to continue to generate positive FCF in 2016 and 2017.

Municipal Projects Support Demand: Government infrastructure construction accounts for about 70% of Lesso's total revenue and Fitch expects increased government spending on urbanisation, water conservancy, anti-pollution projects and construction of urban utility tunnels as well as various urban redevelopment projects to be the main demand driver for Lesso's products.

Geographic Concentration a Constraint: Around 60% of Lesso's revenue in 1H16 came from southern China, one of the most developed markets in the country. However, this geographic concentration presents a business risk and is a constraint on Lesso's IDR.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Low to mid-single-digit revenue growth between 2016 and 2018

- EBITDA margin to remain at around 16%-17% between 2016 and 2018.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-EBITDA margin sustained below 15% (2015: 16.6%)

-FFO net leverage sustained above 1.0x

-Sustained negative free cash flow

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

-Significant increase in market share in the domestic plastic pipes and fittings sector and establishment of a strong presence outside southern China