Fitch: Yingde Gases' Cash Collection Risk Remains High
Yingde's account receivable days declined to 95 days in 1H16, from 103 days at end-2015. This was primarily due to a cut in bills receivable days. Yingde's bill receivables accounted for 21.5% of total net account receivables in 1H16. Yingde's trade receivable days edged down to 70 days in 1H16, from 71 days at end-2015, and its bills receivable days decreased considerably, from 32 days to 25 days. However, the company's 1H16 delinquency rate remains high at 69%, compared with 67% at end-2015. A slump in average selling prices for its merchant business and weaker cash flow generation amid China's feeble steel and chemical sectors adds to the company's risks.
Fitch expects Yingde's FFO-adjusted net leverage to increase in 2016 from 4.1x in 2015 and remain high due to rising debt and the ongoing average selling price slump for its merchant business. This will be partially mitigated by sustained high operating EBITDA margins exceeding 30% (1H16: 36.7%, 1H15: 33.6%), supported by its large onsite businesses, which contributed 84% of total revenue in 1H16, and selling and administration expense cuts in 1H16. Yingde's revenue beat our expectations, rising 9% yoy to CNY4.1bn in 1H16 due to 12% yoy sales volume growth.
Net leverage rises will also be partially offset by capex cuts to CNY1bn in 2016, down 11% from the previous year, which we expect to remain around that level in 2017. We expect 1H16 net-debt/operating EBITDA of around 2.9x, from 3.4x at end-2015. These expectations are based on our assumption of Yingde maintaining its working capital position.
We do not expect tight liquidity conditions, as Yingde has a sufficient cash balance of CNY1.7bn and unused banking facilities of CNY2bn, against CNY3.0bn of short-term debt. The company should not experience refinancing risks, as it has demonstrated reliable access to equity funding and domestic bond markets.
Yingde is also involved in a cash collection law suit against its China-based coal chemical company client, Heilongjiang Heihua Group, a state-owned entity with total claims of around CNY10m. However, another suit has settled as Yingde announced on 25 July that it took back the operating rights of its Pingshan Plant from Hebei Jingye Steel and Iron Company Limited.