Investing.com -- On April 15, 2025, S&P Global Ratings increased the long-term issuer credit rating of China Hongqiao Group Ltd. (Hongqiao) from ’BB-’ to ’BB’. This upgrade is attributed to the aluminum producer’s improved financial and liquidity status, which is expected to be maintained over the next one to two years.

Aiding this positive assessment is the company’s solid operating cash flow (OCF), bolstered by the resilience of aluminum prices. Despite Hongqiao’s capital structure being burdened by a high reliance on short-term debt, S&P Global Ratings anticipates an improvement in the next two years due to an extension of the company’s debt maturity profile.

The stable outlook for Hongqiao is based on the belief that the company’s robust OCF will adequately cover its capital expenditure, ensuring a low leverage for the integrated producer during 2025-2026.

Hongqiao is expected to maintain a healthy cash flow and profitability over the next one to two years, supported by a strong demand for aluminum in China’s energy transition. This demand is expected to counterbalance any softness in some end-use markets such as real estate and infrastructure.

The company’s aluminum sales volumes are forecasted to grow moderately by 1%-1.5% annually over 2025-2026, thanks to resilient demand and the ramp up of its Yunnan project.

In terms of profitability, it is predicted to remain largely stable, with an EBITDA margin of 28%-29% for the next two years, similar to the 28% in 2024. Lower electricity costs due to falling coal prices are expected to moderately improve the profitability of the aluminum segment. However, this will be offset by weakening margins in Hongqiao’s alumina segment, as alumina prices are expected to drop due to increasing supply.

Hongqiao’s annual capital expenditure (capex) is projected to remain at Chinese renminbi (RMB) 12 billion in 2025-2026, up from RMB 11 billion in 2024, mainly due to new energy projects and capacity relocation to Yunnan. Additionally, the Simandou iron ore project will require an additional investment of RMB 5.8 billion in 2025 and RMB 3.6 billion in 2026.

Despite these elevated investments, Hongqiao’s annual OCF of about RMB 30 billion is expected to fully cover these investments. As a result, the company’s debt-to-EBITDA ratio is projected to remain at 0.9x-1.0x in 2025 and 2026, similar to the ratio in 2024.

Hongqiao’s improved liquidity is expected to continue over the next one to two years, primarily due to its higher OCF and a moderate reduction in short-term debt in 2024. This has led to a revision of the company’s liquidity assessment to adequate.

The company’s cash position may stay higher than previous years during the next 12-24 months as it reserves more liquidity for potential market volatility. Its unrestricted cash balance surged by 41% year on year to RMB 45 billion by the end of 2024, thanks to robust OCF.

Hongqiao’s reliance on short-term debt continues to impact its capital structure. Despite efforts to reduce its short-term debts, they still accounted for 60% of the total debt as of the end of 2024. However, this is a decrease from 72%-74% in 2022-2023.

Over the next two years, Hongqiao is expected to continue improving its capital structure by refinancing short-term debt with more long-term financing. The company has already secured RMB 6.7 billion in long-term financing in 2025, including onshore and offshore notes, and a convertible bond.

The rating on Hongqiao could be downgraded if the company’s liquidity becomes less than adequate, or if its debt-to-EBITDA ratio exceeds 2.0x over a sustained period. Conversely, an upgrade could occur if its capital structure improves such that its weighted-average debt maturity stays above two years for a sustained period, while it maintains adequate liquidity and a debt-to-EBITDA ratio below 2.0x.

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