OREANDA-NEWS. Fitch Ratings has affirmed aluminium producer China Hongqiao Group Limited's (Hongqiao) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB'. The Outlook is Stable. Fitch has also affirmed Hongqiao's senior unsecured rating at 'BB', and the outstanding USD400m 7.625% senior unsecured notes due 2017 and USD300m 6.875% senior unsecured notes due 2018 at 'BB'.

The affirmation reflects Hongqiao's large operating scale and its ability to remain profitable amid weak aluminium prices. The ratings are constrained by its high capex and a high degree of customer concentration.

KEY RATING DRIVERS

Leading Aluminium Producer: Hongqiao's annual aluminium smelting capacity increased to 4.54m tonnes in 1H15, up 45% yoy and compared with just over 2m tonnes in 2012. With the company on track to expand its capacity to 5m tonnes by end- 2015, it will become the world's largest aluminium producer by capacity. The utilisation rates at Hongqiao's aluminium smelters' have remained above 95% - much higher than the global average of 80% and Chinese average of 78% - despite the rapid expansion.

Fitch has raised the level at which it would consider negative rating action for the company's funds flow of operations (FFO)-adjusted net leverage to 3.0x from 2.5x. This is to reflect the improvement in the company's business profile due to its expanded scale.

Resilient Ability to Generate Profit: Hongqiao has continued to generate strong EBITDAR margin over the years despite the fall in aluminum prices. Its EBITDAR margin fell to 33.0% at end-June 2015 from 37.8% at end-2012, while its average selling price slid to CNY11,050/tonne from CNY13,300/tonne. Hongqiao is able to stay cost competitive due to its high level of self-sufficiency for the key production inputs of alumina and electricity. It produced about 100% of its alumina demand and 80% of its power needs as of June 2015. Fitch expects Hongqiao's power self-sufficiency ratio to reach 90% in 2017, which will enhance the company's cost structure, but keep capex at an elevated level.

High Capex to Continue: Fitch expects Hongqiao's capex to remain high in coming years as the company continues to increase its captive power plant capacity and its capacities overseas, in particular, its alumina facility in Indonesia to take advantage of local bauxite resources. While this will further improve the company's cost position through a higher level of vertical integration, it will keep the company's funds flow from operations (FFO)-adjusted net leverage at 2.5x-2.7x for 2015-16.

Geographical and Customer Concentration: Hongqiao's customer base is concentrated in China's Shandong province and its top five customers account for 62% of total sales, with the largest customer making up 34% of total sales in 2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Aluminium capacity to reach 5m tonnes by end-2015 and no further significant expansion of aluminium capacity going forward
- Average selling price to continue to trend down due to pressure on domestic aluminium prices
- Estimated capex of CNY14bn for 2015 and CNY10bn for 2016

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Deterioration in Hongqiao's leading market position in Zouping and Shandong
- FFO adjusted net leverage above 3.0x (2.98x at end-2014) on a sustained basis
- EBITDAR/tonne below CNY3,000 (CNY3,883 at end-2014) on a sustained basis
- Continuous bauxite supply disruption

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage below 1.5x on a sustained basis
- EBITDAR/tonne above CNY4,500 on a sustained basis
- Securing a steady long-term bauxite supply