Fitch Ratings has upgraded China Metallurgical Group Corporation's (CMGC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'BBB+'.

The Outlook is Negative. At the same time, Fitch has upgraded the Long-Term IDR and senior unsecured rating on CMGC's 49.18%-owned subsidiary, Metallurgical Corporation of China Limited (MCC), to 'A-' from 'BBB+' with a Negative Outlook.

CMGC's ratings are equalised with those of its parent, China Minmetals Corporation (Minmetals, A-/Negative), using a top-down approach as per Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria - in light of CMGC's strong operational and strategic linkage with Minmetals.

MCC's ratings are equalised with those of CMGC due to strong operational and strategic linkages under the PSL criteria. The two companies are an integrated entity and share the same management team. MCC accounts for almost all of CMGC's revenue, profit, debt and assets.

The Negative Outlook reflects our Negative Outlook on Minmetals, which is driven by Fitch's Outlook on China's 'A+' sovereign rating.

Key Rating Drivers

State-Linked Ratings: Minmetals' rating is assessed under Fitch's Government-Related Entities (GRE) Rating Criteria at 'A-', two notches below China's 'A+' rating. Fitch assessed Minmetals' State Decision-Making and Oversight as 'Strong', on the state's full ownership and strong influence over the company's major decisions. Fitch assesses Minmetals' Precedent of Support as 'Strong', as it has received substantial and consistent tangible support from the state via capital injections and subsidies.

Fitch assesses the reservation of the Government's Policy Role as 'Strong', given the company's strategic importance of securing base metal supply. A default would cause a short-term domestic shortage in base materials, which in turn can cause disruptions to several manufacturing and industrial groups that depend on these metals as key inputs. Fitch assesses contagion risk following a default by Minmetals as 'Strong'. Such a default would have a significant effect on funding for other state-owned enterprises due to Minmetals' large scale, market share and influence over the metals and mining sector.

Strong Parental Linkage: CMGC's rating is aligned with its parent as we assess the parent to have 'High' strategic and operational incentives and a 'Low' legal incentive to support the subsidiary under the 'strong parent, weak subsidiary' path of Fitch's PSL criteria. CMGC is wholly owned by Minmetals and is the parent's most important subsidiary, as the largest contributor to Minmetals' revenue, assets, and EBITDA.

CMGC, the engineering and construction (E&C) arm of Minmetals, collaborates with the parent in construction of metallurgical projects, construction-material logistics, equipment manufacturing, and resource development.

MCC Closely Linked to CMGC: MCC's ratings are equalised with those of CMGC due to the parent's 'High' operational and strategic incentives and 'Low' legal incentive to provide support under the 'strong parent, weak subsidiary' path of Fitch's PSL criteria.

Derivation Summary

CMGC's rating reflects Fitch's assessment of the credit profile of its parent, Minmetals, and the two entities' strong linkages. CMGC plays a vital role in the vertical integration of Minmetals, whose rating is two notches below China's 'A+' rating.

MCC's ratings are equalised with its parent, CMGC, due to their strong operational and strategic linkages. The two companies are an integrated entity and share the same management team. MCC accounts for almost all of CMGC's revenue, EBITDA, debt and cash.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

The Outlook would be revised to Stable if our Outlook on Minmetals is revised to Stable

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Negative rating action on Minmetals

Weakening linkage between Minmetals, CMGC and MCC

Liquidity and Debt Structure

Adequate Liquidity: CMGC had CNY109 billion of short-term debt at June 2023 (including the current portion of perpetual notes and factoring in liabilities based on Fitch's definition) per Fitch estimates, which can be covered by CNY49 billion of available cash and over CNY500 billion of unutilised bank facilities.

MCC reported CNY86 billion in short-term debt at end-2023 (including the current portion of perpetual notes and factoring in liabilities based on Fitch's definition) per Fitch estimates, which can be covered by CNY34 billion of available cash and over CNY500 billion of unutilised bank facilities.

These facilities are uncommitted, as committed credit facilities are not common in the Chinese banking environment. CMGC and MCC both have extensive relationships with onshore and offshore financial institutions, and sound records in refinancing short-term debt.

Issuer Profile

MCC and its parent CMGC are among the leading construction companies in China.

CMGC is 100%-owned by Minmetals, a central-government-owned enterprise. CMGC was merged into Minmetals in December 2015 as mandated by the State-owned Assets Supervision and Administration Commission of the State Council.

MCC is dual-listed on the Shanghai Stock Exchange and the Stock Exchange of Hong Kong. It was 49.18%-owned by CMGC as of June 2023. MCC accounts for almost all of CMGC's revenue, EBITDA, debt and cash.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

CMGC's ratings are equalised with those of its parent, Minmetals, based on Fitch's assessment of the parent's 'High' strategic and operational incentives, and a 'Low' legal incentive to support the subsidiary under the 'strong parent, weak subsidiary' path of Fitch's PSL Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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