OREANDA-NEWS. Fitch Ratings says that China-based Fufeng Group Limited's (Fufeng, BB/Stable) ratings are not affected by its weaker 2015 EBITDA, which was due to lower xanthan gum (XG) prices. Ratings on the maker of monosodium glutamate (MSG) and XG continue to be supported by its market leadership in its key product categories, as well as the company's improving free cash flow (FCF) profile as capex requirements fall.

Fufeng's EBITDA margin dropped to 14.5% in 2015 from 16.3% in 2014, driven by falling XG and fertiliser prices and higher administration costs. However, Fitch estimates that the company turned FCF positive in 2015 as capital expenditure fell. Fufeng reduced its net debt by 24% to CNY2.8bn at the end of 2015. Fitch expects Fufeng to continue generating positive FCF in 2016 and 2017 as capex needs remain low.

Fufeng's MSG business recorded stable performance in 2015, with revenue rising 6% and selling prices increasing 4%. The MSG business accounted for over 50% of Fufeng's consolidated gross profit. Fufeng is the biggest MSG producer globally by capacity, and it enjoys economies of scale, integrated facilities and proximity to raw materials, all of which are difficult to replicate. Fitch expects Fufeng to further strengthen its cost leadership in MSG products as enhanced production technology will be rolled out in all its manufacturing bases in 2016.

Fufeng cut XG prices by 27% in 2015 due to fierce price competition and weak demand from the oil and gas sector. As a result, the gross margin of XG products dropped to 37% in 2015 from 53% in 2014. The company will in 2016 continue to optimise its customer base in the food processing sector, which accounts for 50% of its gross XG sales volume. Fitch does not expect to see a meaningful turnaround in the next 12 months given the oversupply in the market and the depressed oil and gas market.