China Steel Corp (CSC, 中鋼) yesterday said increased capital expenditure is crucial to the company’s long-term development and that conditions in the global steel industry are improving, despite concerns expressed by a credit ratings agency over cash-flow generation and rising debt at the company.
CSC said its plans to increase investment in coal and iron mines were aimed to enhance self-sufficiency in raw material and thereby lower the impact of high raw material costs, the company said in an e-mailed statement.
Moreover, “in view of the establishment of a free-trade agreement among Southeast Asian nations, the company’s investments in Vietnam, India and other Asian countries will help expand sales channels and increase export markets,” CSC said.
The Taiwanese steelmaker’s comments came after the outlook of its long-term and short-term credit ratings was downgraded by Taiwan Ratings Corp (中華信評) from “stable” to “negative” on Wednesday amid concerns over CSC’s financial risk profile.
“The outlook revision reflects our view that China Steel’s leverage and cash flow protection measures are likely to weaken further over the next four quarters because of the company’s weakening profitability and continued large capital expenditure amid softening industry conditions,” Taiwan Ratings said in a release.
The local arm of Standard & Poor’s Ratings Service affirmed its “twAA+” long-term and “twA-1+” short-term corporate credit ratings on CSC, as well as a “twAA+” issue rating on the company’s unsecured corporate bonds, citing the firm’s dominant market position in Taiwan and above-level cost position.
“Despite a negative outlook on our credit profile, our ‘twAA+’ long-term corporate rating is still better than those of major steelmakers in Asia,” CSC said.
The company’s shares closed 1.01 percent higher at NT$29.9 yesterday. The stock has fallen 10.75 percent since the beginning of the year, compared with a decline of 17.69 percent on the benchmark TAIEX over the same period, stock exchange data showed.
The surge in the cost of raw materials caused CSC’s net profit to fall 35.58 percent year-on-year to NT$15.34 billion in the first half of the year. Over the same period revenue rose 6.78 percent to NT$120.13 billion, company’s data showed.
As raw material prices are likely to remain high in spite of the recent stabilizing of steel prices, Taiwan Ratings said CSC’s profitability could come under further pressure over the next three to four quarters and that it expected the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) margin, a measurement of the company’s operating profitability, to decline further in the second half of the year, from 16.7 percent in the first half.
CSC’s EBITDA margin was 27.2 percent in the first half of last year, according to Taiwan Ratings.
Taiwan Ratings also said it expected CSC’s financial leverage to rise over the next two years because of the company’s weakening cash flow and high capital investment plans, including the constructions of a new blast furnace and new facilities for high-end products in Taiwan as well as a cold-rolled steel plant in Vietnam.
As a result, CSC’s ratio of funds from operations to total debt is likely to fall below 30 percent and its debt-to-capital ratio could rise above 40 percent this year, Taiwan Ratings said.
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