China Jinjiang Environment Lowered To 'BB-' Due To Increased Leverage And Parent's Weakened Liquidity; Outlook Negative

  • China Jinjiang Environment Holding Co. Ltd.'s (CJE) higher-than-expected capital expenditure and weakened cash generation ability has negatively affected its financial risk profile.
  • Hangzhou Jinjiang Group, parent of CJE, has also demonstrated a weakened liquidity and financial profile.
  • On March 14, we lower the issuer rating on CJE, a China-based waste-to-energy (WTE) company, to 'BB-' from 'BB'. We also lower the long-term issue rating on the company's senior unsecured notes to 'B+'.
  • The negative outlook reflects the risk that CJE's leverage might increase such that its ratio of funds from operations (FFO) to debt may stay below 9% over the next 12 months. The negative outlook also reflects a potential impact on the rating due to deterioration of the group's liquidity position over the same period.
HONG KONG (S&P Global Ratings) March 14, 2019--S&P Global Ratings lowered the 
rating on China Jinjiang Environment Holding Co. Ltd. (CJE) to reflect its 
heightened leverage and weakened operating cash flow generation, with its 
FFO-to-debt metrics deteriorating to around 10% in 2018. 

CJE's higher-than-expected capital expenditure has materially increased its 
outstanding debt and interest expense. CJE's outstanding reported debt has 
increased by around 32% year-on-year (YoY) to Chinese renminbi (RMB) 6.7 
billion at end-2018, while interest paid increased by around 61% to RMB 390 
million over the same period. CJE's waste treatment capacity at end-2018 has 
increased by around 3% to 29,240 ton/day.

Technological upgrade of the CJE's eight existing WTE facilities has 
temporarily lowered the overall utilization and thereby weakened its operating 
cash flow generation ability. The company recorded a 12.7% YoY decline of 
electricity sales revenue and a 10.5% YoY decline in the on-grid electricity 
supplied in 2018, mainly due to lower utilization rate and a higher internal 
consumption rate for the electricity generated by the WTE facilities. 
Electricity sales revenue is a material revenue contributor to CJE, 
representing approximately 45% of CJE's revenue in 2017 and 35% in 2018 
(excluding construction services revenue under the build-operate-transfer 
[BOT] concession agreements). We expect the technological upgrade to be 
completed by the second half of 2019.

CJE's weakened operating performance in 2018 is partly mitigated by stronger 
contribution from its energy management contracting (EMC) business, which has 
a higher margin (62.5% as of 2018), and contributed approximately a quarter of 
CJE's revenue (excluding construction services revenue under BOT concession 
agreements) in 2018. 

We have also lowered our assessment on Hangzhou Jinjiang Group (HJG), the 
parent of CJE, to reflect its weakened financial and liquidity profile in 
2018. HJG's FFO Interest Cover metric is estimated to fall below 2.5x during 
that period. The weakening financial profile is mainly due to the increase in 
raw material cost from its alumina business, thereby weakened its overall 
gross profit and margins. At the same time, we have observed the company has 
incurred higher interest expense, and also comes with material short-term debt 

Our credit quality assessment on HJG mainly reflects our view of the group's 
high exposure on non-ferrous metals production and trading. We believe HJG has 
a weaker credit profile than CJE because its businesses are subject to 
volatile commodity prices and overcapacity in China's aluminum industry. 
Moreover, HJG's liquidity has also suffered due to its dependence on 
short-term financing, while facing a weakened operating cash generation 
ability. The assessment also takes into consideration HJG's position as one of 
the largest private alumina producers in China.  The company enjoys effective 
cost controls, mainly from satisfactory self-sufficiency on power usage.

We believe CJE is a strategically important and insulated subsidiary of parent 
group HJG. CJE is the primary platform for the group's pillar energy and 
environmental segment. It has a close association with the group's brand name 
and a record of support from the group. Nevertheless, its earnings 
contribution to the group is very small compared to its core alumina and 
aluminum production business.

The negative outlook reflects CJE's commitment to a domestic and foreign 
capacity expansion plan that will dampen its financial metrics such that its 
FFO-to-debt ratio may stay below 9% over the next 12 months. The outlook also 
reflects the increasing refinance risk of the parent group's debt amid 
tightening liquidity in the onshore market.

We may lower the rating on CJE if the company's FFO-to-debt ratio stays 
consistently below 9%. This could happen if:
  • The progress of the technology upgrade of CJE's eight WTE facilities is slower than expected or more of its operating WTE facilities are required to participate in the facility upgrade process;
  • More of CJE's operating WTE facilities were being requested to close down due to town planning or other reasons;
  • CJE makes any large acquisitions or investments that are beyond our expectation, which further increases its interest expense.
We may also lower the rating on CJE if the parent group's liquidity further 
deteriorates. This could be due to (1) the group increasing its reliance on 
short-term borrowing and facing heightened liquidity and payment risk, or (2) 
the group's cash flow generation ability continues to deteriorate or if the 
group incurs larger-than-expected capital expenditure.

We may also downgrade CJE if negative intervention from the parent group 

We may revise the rating outlook on CJE to stable if we expect:
  • CJE to improve its FFO-to-debt ratio at or above 12% over the next 12 months. This could happen if CJE curbs its capital expenditure and completes the upgrade of its facilities as expected, such that the utilization rate and gross margin show signs of recovery; and
  • The parent group to maintain its FFO cash interest coverage consistently above 2.3x and successfully diversifies its capital structure by increasing proportion of long-term debt.
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