MCC Holding (Hong Kong) Corporation Limited -- Moody's affirms CMGC and MCC's Baa1 issuer ratings; outlook stable

Rating Action: Moody's affirms CMGC and MCC's Baa1 issuer ratings; outlook stable

Global Credit Research - 30 Jul 2020

Hong Kong, July 30, 2020 -- Moody's Investors Service has affirmed the Baa1 issuer ratings of China Metallurgical Group Corporation (CMGC) and its key subsidiary, Metallurgical Corporation of China Ltd. (MCC).

In addition, Moody's has affirmed the Baa1 backed senior unsecured ratings and the Baa2 backed subordinate rating on the bonds issued by MCC Holding (Hong Kong) Corporation Limited and guaranteed by MCC.

The outlook on the ratings remains stable.

"The ratings affirmation reflects our expectation that CMGC will maintain a stable business profile, grow its revenues, and contain its capital expenditure and debt growth over the next 12 to 18 months," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

CMGC's Baa1 issuer rating reflects its standalone credit profile and a three-notch uplift based on Moody's expectation that CMGC will continue to receive strong support from the Government of China (A1 stable) through its parent, China Minmetals Corporation (Baa1 stable), if times of need.

Moody's support assessment reflects (1) CMGC's status as a core subsidiary of China Minmetals, accounting for 51%, 56% and 45% of total assets, revenue and adjusted EBITDA respectively at the end of 2019, (2) the integral and important role that CMGC plays in the engineering and construction (E&C) businesses of China Minmetals, which are strategically important to the Chinese government; and (3) the government's strong ability to provide support, as reflected in its A1 rating.

CMGC's standalone credit profile reflects the company's (1) long track record, strong market position and large operating scale in the Chinese E&C sector, particularly in the construction of steel plants; (2) expansion into non-metallurgical construction, which helps reduce its reliance on the matured metallurgical construction sector; and (3) good access to domestic banks and capital market financing.

However, CMGC's standalone credit profile is constrained by (1) its exposure to the cyclical nature of property development and steel industries; and (2) the execution and financial risks associated with its large E&C and overseas mining projects.

CMGC recorded 15.9% growth in revenue in the first quarter of 2020 and 21.9% growth in new orders in the first half of 2020 compared to the same period last year, despite the temporary disruptions caused by the coronavirus outbreak. The company's order backlog/revenues was 2.8x at end of 2019, providing good visibility for its expected revenues over the next two years. Moody's expects the company to register 5% and 8% revenue growth in 2020 and 2021 respectively.

That said, the company's EBITDA margins will decrease to around 6.8% in 2020-21 from 7.1% in 2019, as it will gain more construction orders from infrastructure projects, which typically have lower margins than the company's metallurgical construction and engineering services.

But Moody's expects the company's adjusted debt/EBITDA will be maintained at around 5.5x in 2020-21, supported by company's prudence in containing its capital expenditure at around RMB5 billion per annum and in maintaining its adjusted debt at around RMB136 billion. Such level of leverage supports the company's standalone credit profile.

MCC's Baa1 issuer rating reflects its standalone credit strength and a three-notch uplift reflecting Moody's expectation that the company will receive strong support from its parent, CMGC, in times of stress.

The credit profiles of MCC and CMGC are closely linked, given that MCC is the key operating subsidiary of the group, accounting for over 97% of CMGC's assets and revenues at the end of 2019.

CMGC and MCC's issuer ratings also take into account the following environmental, social and governance (ESG) considerations.

CMGC's resource development segment has elevated environmental risks. They include pollution from mining and smelting, management of soil, water and waste, and natural and man-made disasters such as tailing dam failures and pit wall collapses. Nevertheless, CMGC's mining businesses are small in scale and have a track record of compliance with relevant regulations.

In terms of governance risk, Moody's has considered (1) CMGC's 100% indirect ownership by the State-owned Assets Supervision and Administration Commission under the State Council of China, which supervises the company's operations and financials; and (2) the fact that both CMGC and MCC have exercised prudence in managing their debt leverage by limiting investments in BOT/PPP projects.

The stable outlook on CMGC reflects Moody's expectation that (1) the company's credit metrics will be maintained at levels appropriate for its standalone credit profile; and (2) its important role in China's metallurgical and construction sectors, and the Chinese government's ability to support the company through its parent, will remain intact.

The stable outlook on MCC mirrors that of CMGC.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if CMGC's standalone credit profile improves and its parent, China Minmetals, is upgraded.

CMGC's standalone credit profile could improve if it achieves steady revenue growth, stable profitability and debt reductions, such that the company's adjusted debt/EBITDA falls below 4.5-5.0x on a sustained basis.

An upgrade of CMGC's rating will trigger an upgrade of MCC's rating.

Moody's could downgrade CMGC's rating if the company's standalone credit profile weakens or its parent, China Minmetals, is downgraded.

CMGC's standalone credit profile could weaken because of a material deterioration in its business or financial profile. Credit metrics indicative of a weakening standalone profile include a fall in its order backlog, lower profitability or an increase in debt, such that the company's adjusted debt/EBITDA stays above 6.0x-6.5x on sustained basis.

A downgrade of CMGC will trigger a downgrade of MCC's rating.

The principal methodology used in these ratings was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China Metallurgical Group Corporation (CMGC) is engaged in the business of engineering and construction, equipment manufacturing, property development and resources development.

Headquartered in Beijing, CMGC is 100% owned by China Minmetals Corporation, which is in turn fully owned by the State-owned Assets Supervision and Administration Commission under the State Council of China. In 2019, CMGC reported total revenue of RMB339 billion and total assets of RMB471 billion.

Metallurgical Corporation of China Ltd. (MCC) is the key subsidiary of CMGC. MCC accounted of 99% and 97% of CMGC's adjusted EBITDA and assets in 2019. MCC is one of the largest E&C companies in China, and the market leader in the construction of domestic steel plants. As of July 2020, MCC was 49.18% owned by CMGC.

The local market analyst for these ratings is Jin Wu, +86 (212) 057-4021 .

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Chenyi Lu VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.

MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.

All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​​​​​​​​