OREANDA-NEWS. February 02, 2015.  This announcement corrects the version published on 24 October 2014 to clarify that the 2019 US-dollar denominated notes are issued by Favor Sea Limited.

Fitch Ratings has affirmed China XD Plastics Co. Ltd's (XD Plastics) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. The rating reflects the company's steady performance over the past year and adequate liquidity.

Fitch has also downgraded XD Plastics' senior unsecured rating and the rating on its 2019 US-dollar denominated notes to 'B+' from 'BB-', based on the agency's recovery analysis for the company's latest debt structure. The recovery rating on the bond is 'RR5'. The notes are issued by XD Plastics' wholly owned subsidiary Favor Sea Limited.

KEY RATING DRIVERS

Steady Cashflow Generation: XD Plastics' revenue rose 75.2% to USD1.05bn in 2013, driven by a 50.5% increase in sales volume and 14.6% increase in average selling price (ASP). Although the company's reported gross margin dropped slightly to 21.3% in 2013 from 24% in 2012, the net cash provided by operating activities of USD115.6m in 2013 was much stronger than the net cash outflow of USD31.4m in 2012.

For the first half of 2014, XD Plastics's sales volume rose 14.6% from a year earlier to 150,000 tonnes. Revenue during the period rose by 31% from a year earlier, driven by both volume and ASP increase. Although the receivable days (Fitch defined) increased to 88 days for 1H14 from 75 days for full-year 2013 due to the company's expansion in new markets, we expect the operating cash flow generated during 2014 to be higher than a year ago.

Long-Term Funding Secured: XD Plastics has successfully secured long-term funding through the issuance of USD150m of 11.75% senior unsecured notes due 2019, and it has extended the effective maturity date for the USD100m convertible preferred shares to Feb 2019.

In addition, under the terms of the preferred shares, XD Plastics may convert all convertible preferred shares to common shares after its 2013 net profit exceeded CNY800m. The company reported a 2013 net profit of CNY830m, and may convert the preferred shares at any time, which means it isn't bound by this potential debt obligation any longer. This removes a major potential liquidity risk.

Higher Priority Debt: Although XD Plastics issued the US dollar bond in February 2014, its higher-priority debt further increased to USD346m at end-June 2014 from USD314.7m at end-2013 because the company didn't use all of the bond proceeds to repay debt. This large amount of higher-priority debt warrants a downgrade to the senior unsecured rating based on Fitch's recovery analysis. The company used part of the bond proceeds to fund the building of a new plant in Sichuan (total planned capex of approximately USD410m).

Capacity Expansion on Track: Construction of XD Plastics' new plant at Sichuan, which will add planned capacity of 300,000 tonnes a year, is on track. XD Plastics currently has capacity of 390,000 tonnes a year at Harbin. The new facility is due to start production in end-2015 and start generating operating cashflow in 2016. In 2014, XD Plastics started building a small plant with capacity of 4,000 tonnes a year in the United Arab Emirates to take advantage of the low cost, high quality local feedstock supply and low tax rate.

Moderate Leverage Profile: XD Plastics would still maintain a healthy balance sheet during its capacity expansion, with estimated funds from operations (FFO)-adjusted net leverage peaking at around 1.5x in 2015 (2013: 0.15x). We expect the company to deleverage beginning 2016, after the completion of the new plants.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, result in negative rating action:

- EBITDAR margin sustained below 15% (2013: 20%)
- Receivable days sustained above 90 days
- FFO-adjusted net leverage sustained above 2.5x during the Sichuan plant's construction period or/and sustained above 2x after the plant is completed

Fitch does not envisage any positive action until XD Plastics achieves market leadership in multiple geographical regions in China.