OREANDA-NEWS. Fitch Ratings says Yingde Gases Group Company Limited (Yingde Gases, BB/Negative)'s 1H15 results confirm the agency's view that the company's deleveraging has been delayed by deterioration in cash collection due to the sluggish business environment. The China-based company's interim results show no signs of significant improvement in delinquent trade receivables and its leverage remained high. However, its operating EBTIDA margin continued to expand.

On 17 November 2014, we revised the Outlook on Yingde Gases' Issuer Default Rating (IDR) to Negative from Stable because we expected its cash collection cycle to worsen with low utilisation in the domestic steel industry, its main customer base. The weaker cash collection would delay the company's deleveraging process. The ratings will likely to be downgraded to 'BB-' if there is deterioration in the company's business profile, significant increase in delinquent account receivables, and if FFO-adjusted net leverage remains above 4.0x. Conversely, the Outlook will be revised back to Stable if there is clear trend towards deleveraging in 2015.

The company's FFO-adjusted net leverage in 1H15 remained around the 2014 level of 4.4x, above 4.0x, the level at which Fitch would consider negative rating action. The delinquent account receivables increased 9% yoy to CNY912m in 1H15 after jumping 154.6% in 2014. We expect Yingde Gases' FFO-adjusted net leverage to decrease slightly on lower capex and better operating EBITDA, but still remain above 4.0x, because there is little chance that account receivables past due would increase significantly at end-2015.

Data from China's National Bureau of Statistics showed that total crude steel output in January-July 2015 declined 1% yoy compared with a 5.6% increase in all of 2014. This has adversely affected the company's top-line growth. In 1H15, the company's revenue only increased 3.4% yoy compared with 12.4% growth in all of 2014. Additionally, delinquent account receivables continued to increase, albeit at a slower pace, to CNY912m as of end-June 2015, which accounted for 47% of total net account receivables. Yingde Gases expects to collect some cash by end-2015 from two major delinquent trade receivable accounts that have gross outstanding amounts totalling CNY588m and doubtful debt provision of CNY204m.

The company's profitability continued to increase in spite of the sluggish operating environment. Operating EBITDA margin edged up 1.1 pp yoy to 33.4%, primarily due to the company's cost pass-through pricing mechanism for its on-site gas segment and several cost-cutting initiatives.