(The following was released by the rating agency)
Using Fitch's Parent and Subsidiary rating Linkage methodology, the 'A-' IDR incorporates a one-notch uplift to Baosteel's standalone rating, reflecting the strong linkages between its state-owned parent Baosteel Group Corporation (BGC) and the Chinese government. This is based on BGC's and Baosteel's strategic importance to the country and potential support from the Chinese government should it be required. BGC, being the largest steel company held by the state-owned Assets Supervision and Administration Commission of the State Council, has been identified by the Chinese government to lead the restructuring of the country's steel industry - an important priority for China's industrialisation and urbanisation.
Baosteel's standalone rating reflects its position as the leading high value-add steel producer in China. The company has strong market share in its major products such as cold-rolled (CR) auto sheet (with 50% market share), home appliance sheet (37%), and pipeline steel (33%). CR coil products, stainless steel products, and steel tubes contributed to 52% of revenues in 2009. Despite weak CR steel product prices in 2010, Baosteel continued to generate robust revenue and operating profit growth. The company's high average selling price (ASP) for its steel products of CNY6,300 in 2010, based on Fitch estimates, was 26% higher than in 2009, suggesting that Baosteel has continued to enhance its product offerings with high value-added steel products.
Baosteel has maintained a stable financial profile despite a volatile operating environment between 2007 and 2010, relative to other Chinese steel producers and most global steel companies. Baosteel's EBITDA margin ranged from a low of 14% in 2009 to a high of 18% in 2010, whereas Angang Steel Co Ltd's and Wuhan Iron & Steel Co's EBITDA margin over the same period ranged from 24% in 2007 to 12% in 2009 and from 24% in 2007 to 11% in 2010 respectively. Capex and dividend payment have been reduced in response to the decline in EBITDA in 2009, alongside working capital reduction, which helped reduce Baosteel's debt level. Adjusted net debt/operating EBITDAR fell to 1.52x for the LTM to September 2010 from 2.9x in 2009, after an improved operating environment lifted EBITDAR. Its EBITDA margin improved to 15.8% from 14% during the same period.
Fitch expects steel companies in 2011 at least to maintain their profitability as the steel price increase is likely to offset any raw material cost increases. Baosteel's strong market share in its major products suggests close working relationship with its customers, making it likely for the company to pass on any raw material cost increases to its customers. This is reflected in Baosteel's stable EBITDA margin.
The Stable Outlook reflects Fitch's expectations that the over-supply condition in the Chinese steel industry will improve with the government's restructuring drive and the restriction placed on building new steel plants. Aggressive capex and acquisition of production facilities resulting in declining unit profit or a higher debt burden, and in turn a net debt/EBITDAR exceeding 1.5x on a sustained basis may lead to negative rating action. The ratings may also come under pressure if BGC's support is insufficient to offset a deterioration in the credit profile of Baosteel or if state support for the company is deemed to have weakened. No positive rating action is envisaged in the next 12-18 months.