OREANDA-NEWS. Fitch Ratings has affirmed Yingde Gases Group Company Limited's (Yingde) Long-Term Issuer Default Rating (IDR) at 'BB'. The agency has also affirmed at 'BB' the senior unsecured debt ratings of Yingde and Yingde Gases Investment Limited, and the USD425m 8.125% senior unsecured notes due 2018 and the USD250m 7.25% senior unsecured notes due 2020 issued by Yingde Gases Investment Limited.

Fitch's Outlook on Yingde remains Negative, as we expect the working capital position to remain a significant risk. This is despite less volatility in cash collection in 1H15, and deleveraging from 2015 to 2017 due to capex reduction.

KEY RATING DRIVERS

Working Capital Remains a Burden: Fitch expects Yingde's working capital cycle to stay at above 50 days in 2015, driven mostly by a rise in account receivable collection days. This is in turn due in large part to weak cash generation and tighter liquidity for steel makers.

The domestic steel sector is still plagued with overcapacity, low utilisation rates and soft ASP. Yingde is subject to uncertainties regarding cash collection and further additions to its delinquent accounts should operating conditions deteriorate. An increased working-capital position has hindered the ability to generate sustainable positive FCF - even during an industry downturn when significant capex reductions have taken place.

De-leveraging Trend Evident: Fitch expects Yingde's FFO-adjusted net leverage to improve to 3.5x-3.7x in 2015/2016 from 4.5x in 2014, due to lower capex and stable EBITDA generation. We see capex dropping to CNY1.0bn/1.5bn in 2015/2016 from CNY2.0bn in 2014, and the EBITDA margin to remain stable at 32%-33% between 2015 and 2017.

De-leveraging is expected to come from capex reduction, driven mostly by the weak industry fundamentals of the steel sector in China, which accounts for approximately two thirds of Yingde's projects. While this translates into slower top-line growth, the company's 'take-or-pay' business model with a pre-contracted average selling price (ASP) also warrants a relatively stable EBITDA margin..

Stable Profitability: Yingde enjoys more stable profitability than its peers. This is due to the high contribution from its on-site business, the bulk of which employs the take-or-pay business model with pre-contracted ASP. The EBITDA margin was stable and remained within 30%-32% between FY11 and FY14. Yingde's competitors, on the other hand, tend to have more unpredictable earnings profiles as they have higher exposure to the merchant gas sales segment, which has wider gross margins but is subject to greater volatility in demand and pricing.

Small by Global Standards: Yingde has a firm hold on the Chinese on-site segment, but its scale is still small by global standards. The international industrial gases sector is dominated by the big players with strong market positions in the merchant market, and the financial strength to compete in the on-site business.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- 3%-6% revenue growth between 2015 and 2017;
- Capex of CNY1.0bn/1.5bn in 2015/2016, respectively;
- 32%-33% gross margin between 2015 and 2017.

RATING SENSITIVITIES

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin sustained below 30%;
- Working capital days sustained above 50 days;
- Sustained negative FCF generation;
- FFO-adjusted net leverage sustained above 4.0x.

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- The negative triggers are not met over the next 12 months.