Fitch Ratings has affirmed Aluminum Corporation of China's (Chinalco) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'.
The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.
Chinalco is the largest aluminium producer in the world, and one of the top producers of copper, lead and zinc in China. The company is directly owned by China's State-owned Assets Supervision and Administration Commission (SASAC). Chinalco is rated two notches below the China sovereign's rating of 'A+'/Stable under Fitch's Government-Related Entities (GRE) Rating Criteria, reflecting the state's strong incentive to support the company.
The Stable Outlook reflects Fitch's expectation that the likelihood of Chinese government support for Chinalco and its operations will be maintained.
Key Rating Drivers
Strong Linkage with the State: Fitch assesses Chinalco's status, ownership and control as 'Strong'. Chinalco is wholly owned by the state and has maintained its status as a backbone state-owned entity and a state-owned capital investment company, which has specific strategic directives set out by the state. Chinalco's chairman and senior management are appointed by the Central Committee of the Communist Party of China and the State Council.
Fitch assesses Chinalco's support record as 'Moderate'. The state has provided substantial support to the company, including consistent and sizeable annual subsidies, equity and asset injections, and favourable tax treatments. However, these forms of financial support, while strong, have been insufficient in helping the group sustain a strong financial profile. We expect government support to continue because of Chinalco's role in consolidating the domestic nonferrous industry.
Strong Impact of Default: Fitch has assessed the socio-political impact of a Chinalco default as 'Strong'. We believe Chinalco's market leadership, centrally mandated role in advancing and reforming the domestic nonferrous industry, and its contributions to China's defence and aerospace sectors support the scoring.
The financial implications of a default are also assessed as 'Strong'. Chinalco is an active bond issuer in both domestic and international markets, and is regarded as a national metal and mining blue chip by international lenders. A default of Chinalco would significantly impair market sentiment for other GREs in China.
Higher SCP: Fitch has revised Chinalco's Standalone Credit Profile (SCP) to 'b+' from 'b' to reflect its improved financial structure. We estimate Chinalco's net leverage - total net debt with equity credit/operating EBITDA - was 5.2x in 2021, and will stay at around 5.5x in 2022 to 2024, a significant improvement from 9x in 2020 due higher aluminium and copper prices. Chinalco's financial flexibility remains comfortable with interest coverage of over 3.0x and well-spread-out maturities with short-term debt accounting for less than 40% of total debt.
Strong Profitability: We expect Chinalco's profitability to stay high on strong aluminium and copper prices. We forecast Chinalco's EBITDA margin at 11.5% this year, similar to 2021, before moderating to below 11% in 2023 and 2024 as commodity prices normalise. Chinalco will maintain positive free cash flow generation in our rating horizon due to the improved profitability and a conservative capex and investment plan in line with the company's strategy, which has switched from scale expansion to high-quality development.
World's Largest Aluminium Producer: Chinalco became the largest aluminium producer globally after acquiring Yunnan Metallurgical Group in 2018. Chinalco has around 22 million tonnes of alumina refining capacity and around 8 million tonnes of aluminium smelting capacity, accounting for around 25% and 20% of China's total alumina and aluminium capacity, respectively. Its size and scale give it significant influence over supply and demand in the domestic aluminium market; no other base-metal industry in China has the same market concentration.
Greater Nonferrous Diversification: Chinalco has transitioned from a pure aluminium producer to a nonferrous conglomerate, as it is also the largest lead and zinc producer in Asia and a top-three producer of copper products in China. Revenue contribution from non-aluminium businesses has increased in recent years to around 40% in 2020. The development of non-aluminium businesses will improve Chinalco's diversification and its ability to withstand the aluminium market's volatility.
Derivation Summary
Chinalco's IDR is notched from China's Long-Term IDR of 'A+' to reflect its strong status as a GRE because of its leading market position in the country's nonferrous metal industry and irreplaceable contribution to the military. Fitch's assessment of Chinalco under the GRE criteria is in line with our assessment of China Communications Construction Company Limited (A-/Stable), a market leader in China's maritime engineering and construction sector. Both companies are assessed as having 'Strong' status, ownership and control, 'Moderate' support record, and 'Strong' socio-political and financial implications of default.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to stay between CNY480 billion and CNY510 billion from 2021 to 2024
EBITDA margin to normalise from 11.9% to 10.9% from 2021 to 2024
Capex and investment outflow of CNY18 billion per year from 2021 to 2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the Chinese sovereign, provided the likelihood of support from the government remains intact.
Strengthening of likelihood of support from the Chinese government.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on the Chinese sovereign.
Weakening of likelihood of support from the Chinese government.
For the sovereign rating of China, the following sensitivities were outlined by Fitch in our rating action commentary on 28 June 2021:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Structural features: A material reduction in macro-financial risks and associated contingent liabilities facing the sovereign, for example, by maintaining credit growth below nominal GDP growth over a multi-year period, which would cause the removal of the -1 Qualitative Overlay notch on structural features.
External finances: Evidence of widespread adoption of the Chinese yuan as a global reserve currency, as reflected in a substantial increase in the share of yuan-denominated claims in the IMF's currency composition of official foreign-exchange reserves (COFER) database.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Structural features: A further rise in macro-financial risks, for example through failure to maintain credit growth close to or below nominal GDP growth over the next few years.
Public finances: A sustained upward trend in government debt/GDP, or a crystallisation of contingent liabilities that leads to a sharp rise in government debt relative to 'A' peers.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Comfortable Liquidity: Chinalco had cash and equivalents of CNY53 billion at end-September 2021 and short-term debt of CNY119 billion. It had unused facilities of about CNY450 billion. These are uncommitted facilities, but we believe they are adequate because committed facilities are non-existent in China, and Chinalco's status as an important GRE has enabled the company to roll over short-term bank loans consistently.
Issuer Profile
Chinalco is a leading diversified, vertically integrated producer of nonferrous metals in China, focusing on alumina, primary aluminium, copper and lead-zinc. It is the largest supplier of electrolytic aluminium and alumina globally and a top producer of copper, lead and zinc in China.
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
Chinalco is rated two notches below the China sovereign's rating under Fitch's GRE rating criteria, reflecting the state's strong incentive to support the company
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
[Editorial queries for this story should be sent to newswire@enpublishing.co.uk]
RATING ACTIONS
Entity / Debt
Rating
Prior
Aluminum Corporation of China
LT IDR
A-
Affirmed
A-
senior unsecured
LT
A-
Affirmed
A-
Chinalco Capital Holdings Limited
senior unsecured
LT
A-
Affirmed
A-
subordinated
LT
BBB+
Affirmed
BBB+
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
APPLICABLE CRITERIA
Government-Related Entities Rating Criteria (pub. 30 Sep 2020)
Corporate Hybrids Treatment and Notching Criteria (pub. 12 Nov 2020)
Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity)
Corporate Rating Criteria (pub. 16 Oct 2021) (including rating assumption sensitivity)
Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 16 Oct 2021)
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v8.0.1 (1)
ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
Aluminum Corporation of China EU Endorsed, UK Endorsed
Chinalco Capital Holdings Limited EU Endorsed, UK Endorsed
DISCLAIMER
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Solicitation Status
The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.
Endorsement Policy
Fitch's international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch's approach to endorsement in the EU and the UK can be found on Fitch's Regulatory Affairs page on Fitch's website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.
Energy and Natural Resources
Metals and Mining
Corporate Finance
Asia-Pacific
British Indian Ocean Territory
China
ENTITIES
Aluminum Corporation of China
Chinalco Capital Holdings Limited
ISSUER CONTENT
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Fitch Rates Chinalco's Proposed USD Notes 'A-'
Aluminum Corporation of China
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Fitch Rates Chinalco's Proposed USD Notes 'A-'
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Fitch Affirms Chinalco's Ratings at 'A-'; Outlook Stable
Aluminum Corporation of China
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ALUMINUM CORPORATION OF CHINA LIMITED 
