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Xinhua Far East Downgrades the Issuer Rating of Inner Mongolia Eerduosi Cashmere Products Co Ltd to BB+

2006-12-21 17:03 1276

HONG KONG, Dec. 21 /Xinhua-PRNewswire/ -– Xinhua Far East China Ratings

("Xinhua Far East") today concluded its review on Inner Mongolia Eerduosi

Cashmere Products Co Ltd ("Erdos" or "the Company", SH A 600295; SH B 900936)

by downgrading its issuer credit rating to BB+ from BBB-. Its rating outlook

is changed to stable from negative.

(Logo: http://www.prnasia.com/sa/200611140926.gif )

The downgrade was prompted by the Company's very high debt levels after

the acquisition of a 24% stake in Erdos Power Metallurgy Co Ltd ("Power

Metallurgy Company") and the possibility that its debt levels may rise even

further with its ongoing investments in power metallurgy projects. Xinhua

Far East also notes the Company has shifted its focus to the cyclical

metallurgy industry, a move which has overshadowed its risk profile, making

it inconsistent with an investment-grade company. We are also concerned

about its inexperience in the new industry and its aggressive financial

policy.

When Erdos completed its acquisition of the 24% equity stake in Power

Metallurgy Company, it consolidated the latter company's July to September

results into its financial statements. As expected by Xinhua Far East, this

significantly raised its debt levels and liquidity risks and, at the end of

the third quarter of 2006, Erdos' gross debt to total capital was up 55.8%

from 28.5% as of year-end 2005. Its gross debt and net debt rose to

RMB6,139.3 million and RMB5,079.3 million respectively from RMB1,358 million

and RMB456.1 million as of year-end 2005. Furthermore, 68% of the gross debt

was short-term in nature, indicating the Company is probably using short-term

debt to finance its long-term projects.

Yet the Company's debt levels could rise even further, with several power

metallurgy projects still under construction or in planning stage. The

budget for its coal-electricity-silicon alloy project and associated

equipment is RMB17.2 billion, according to figures from the Power Metallurgy

Company, with accumulative investments reaching RMB4.1 billion at the end of

2005. Although the company could turn to the equity markets or joint

ventures to partly finance the project, it could quite possibly raise some

funds through debt, given the large amount of investment involved and its

aggressive financial policies to date.

At the same time, given the company's inexperience in the metallurgy

industry and given the fact that the industry is cyclical in nature, Erdos'

foray into this new industry has heightened its risk profile. Although power

metallurgy sector sales accounted for just 13.3% of the Company's total

revenues of RMB2,169.9 million in the first three quarters of 2006, this

percentage is expected to rise substantially next year when it incorporates

Power Metallurgy Company's full-year results and when more power metallurgy

projects are completed and put into production in succession. As such, the

challenges Erdos faces in managing a multi-industry conglomerate are

significant.

Another factor overshadowing Erdos is that Power Metallurgy Company's

performance itself could be negatively affected by oversupply and fierce

competition, despite the cost advantages it holds in respect to abundant coal

resources. Power metallurgy sector sales in the third quarter of this year

were RMB289.1 million, 46.1% of which derived from ferro silicon products and

16.7% of which were from electricity. Although demand for Ferro silicon has

risen significantly in recent years with the rapid development of the

domestic steel industry, the market has encountered oversupply, with

production capacity rapidly expanding also. There have also been indications

that the electricity market in Inner Mongolia has also been in over-supply in

recent years. Overall, Xinhua Far East does not believe Erdos' financial

profile and risk structure will substantially improve over the next few

years.

Even so, as a leader of cashmere industry, Erdos is nevertheless able to

generate relatively stable income from cashmere, supporting a stable ratings

outlook.

In 2005, Erdos realized turnover of RMB2.9 billion and, at the end of

June 2006, Erdos Cashmere Group Co Ltd was the company's largest shareholder,

with a 40.7% stake.

Established in April 2003, Erdos Power Metallurgy Co Ltd is based in the

Qipanjing Industrial Park in Eerduosi of the Inner Mongolia Autonomous

Region. Leveraging its access to the region's natural resources, it engages

primarily in power metallurgy projects. It currently holds a 54% share in

Erdos Power Metallurgy Co Ltd and intends to increase its stake to 85%.

Erdos is a constituent of both the Xinhua/FTSE China 200 and B35 Indices

and, as of market close on December 20, 2006, its total A-share market

capitalization and investable capitalization were RMB3,005 million and RMB901

million respectively. Its B-share market cap totaled US$172 million, all of

which is investable.

For the rating report summary, please visit

http://www.xinhuafinance.com/creditrating .

About Xinhua FTSE China 200 and B35 Indices

Xinhua FTSE China 200 Index is the large cap index in the Xinhua FTSE

China A Share Index Series and includes the top 200 companies in China by

market cap. It is designed as a tradable index and is calculated in real-

time every 15 seconds. Xinhua FTSE China B 35 Index is the large cap

tradable index in the FTSE Xinhua China B Index Series, covering ‘B' shares

listed on the Shanghai and Shenzhen stock exchanges. It provides

international investors with exposure to the mainland Chinese market. For

daily data and further information, see http://www.xinhuaftse.com .

About Xinhua Far East China Ratings

Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture

in China that aims to rank credit risks among corporations in China. It is a

strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai

Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance

partner company in 2003 and the first China member of The Association of

Credit Rating Agencies in Asia in December 2003.

Capitalizing on the synergy between Xinhua Finance and Shanghai Far East,

Xinhua Far East's rating methodology and process blend unique local market

knowledge with international rating standards. Xinhua Far East is committed

to provide investors with independent, objective, timely and forward-looking

credit opinions on Chinese companies. It aims to help investors

differentiate the credit risks among the corporations in China, thereby,

cultivating their awareness and promoting information disclosures and

transparency in China market. For more information, see

http://www.xfn.com/creditrating .

About Xinhua Finance Limited

Xinhua Finance Limited is China's unchallenged leader in financial

information and media, and is listed on the Mothers board of the Tokyo Stock

Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial

markets and the world, Xinhua Finance serves financial institutions,

corporations and re-distributors through four focused and complementary

service lines: Indices, Ratings, Financial News and Investor Relations.

Founded in November 1999, the Company is headquartered in Shanghai with 20

news bureaus and offices in 19 locations across Asia, Australia, North

America and Europe. For more information, please visit

http://www.xinhuafinance.com .

About Shanghai Far East Credit Rating Co., Ltd

Shanghai Far East Credit Rating Co., Ltd. is the first and leading

professional credit rating company with comprehensive business coverage in

China. It is an independent agency established by the Shanghai Academy of

Social Sciences with the mission to develop internationally accepted

standards for capital market in China. The company is a pioneer in

conducting bond-rating business in China. For years, it has been authorized

by the Shanghai branch of the PBOC to undertake loan certificate credit

rating.

Since establishment, it has rated over 1,000 corporate long-term bonds

and commercial papers, based on the principles of objectivity, fairness and

independence. The company has also maintained over 50% market share in the

loan certificate-rating sector in Shanghai for three consecutive years. With

its strong local presence and knowledge, it provides investors with unique

and the most insightful credit opinion. For more information, see

http://www.fareast-cr.com .

Source: Xinhua Far East China Ratings
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