OREANDA-NEWS. Fitch Ratings says today that Binhai Investment Company Limited's (BHI; BBB-/Stable) mixed financial and operating performance for 1H15 points to potential short-term pressure on its financial profile. While this is likely to improve over the next 12-18 months, the rating headroom for BHI remains limited.

BHI's revenue from connection fees declined by 6.1% in 1H15 from a year earlier to HKD257.8m. The decrease reflects slower economic growth in China, including in the Tianjin Binhai area, which is BHI's key region of focus. However, piped gas sales volume increased by about 9% in 1H15 from a year earlier, broadly in line with growth reported by larger Chinese city gas peers, and faster than the low single-digit average gas demand growth for the whole of China during this period. The company expects its 10 largest existing customers to drive a 9% increase in gas sales volume for the full year in 2015, even though some customers have cut their gas requirements.

Gross profit margin for piped gas sales improved to 9.9%, compared with 2.8% in 1H14. The wider margin is in line with China Resources Gas Group Limited's (CRG; BBB+/Stable) experience of improved margins at its operations in the Tianjin area. Both BHI and CRG expect margins and volumes of piped gas in their areas of operations in Tianjin to continue to expand, driven by still-low penetration and regulatory support for the sector, and largely unaffected by the damage and disruptions caused by the explosions at a chemical warehouse in Tianjin on 12 August.

BHI's EBITDA in 1H15 increased by approximately 16% from a year earlier to HKD252m. However, BHI's credit metrics remained around the end-2014 levels of 2.6x for funds flow from operations (FFO) fixed-charge cover and 4.2x for FFO net adjusted leverage. This was due to a less favourable working capital position at June 2015 - we estimated a working capital-related cash outflow of over HKD170m, which resulted in higher-than-expected net debt at June 2015. BHI's management attributes this to seasonal factors, and expects the working capital cycle to normalise by end-2015 to levels those seen at end-2014.

The 1H15 results do not immediately affect BHI's ratings, which incorporate a standalone rating assessment of 'BB' plus a two-notch uplift for support from its ultimate parent, the Tianjin municipality. We expect BHI's financial profile to improve over the next 12-18 months, based on our expectation of demand growth for gas in BHI's areas of operation and stable margins on gas sold. However, the headroom under BHI's standalone rating of 'BB' remains limited. Fitch has incorporated its expectation that robust growth in cash generation will improve the company's standalone credit profile from 2015 onwards. A negative rating action could arise if the company does not improve its funds flow from operations (FFO) fixed-charge cover to above 3.0x, and FFO net adjusted leverage to below 4.0x, on a projected basis from 2017.