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.
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
www.xinhuafinance.com/creditrating .
Note to Editors:
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 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
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
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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
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
www.fareast-cr.com .
More Information:
Hong Kong
Joy Tsang, Corporate & Investor Communications Director, Xinhua Finance
Tel: +852-3196-3983/ +8621-6113-5999/ +852-9486-4364
Email: joy.tsang@xinhuafinance.com
US
Taylor Rafferty (IR/PR Contact in US)
Ms. Ishviene Arora
Tel: +1-212-889-4350
Email: ishviene.arora@taylor-rafferty.com