China Hongqiao Group Ltd.

The positive outlook on Hongqiao reflects our view that the company's improved financial discipline is likely to speed up its debt reduction over the next 12-24 months, enhancing its rating buffer against industry uncertainties. We forecast that Hongqiao's leverage will increase moderately in 2019 on lower product prices and higher production costs, but the company's free operating cash flows will remain positive on contained capital spending. We may revise the outlook to stable if Hongqiao's financial management is not as disciplined as we expect. One indication of this would be the company's capex being significantly higher than our expectation. We could also revise the outlook to stable if Hongqiao's financial metrics are much weaker than we expect, due to significant

...Capex to remain moderate. We expect China Hongqiao Group Ltd. (Hongqiao) to contain its capex at moderate levels in 2019-2020 owing to the company's reduced growth appetite. We believe Hongqiao's debt-funded growth phase is over, given the company is already one of the largest primary aluminum producers globally. Hongqiao's capex cuts in the past two years support our view. Maintaining financial discipline and reducing debt will be key factors that could push up the rating. EBITDA could weaken due to pressure on aluminum demand and prices, and rising costs. Hongqiao's free operating cash flows should remain positive in 2019-2020 despite a likely decline in EBITDA and operating cash flows. We expect decelerating economic growth in China to exert downward pressure on aluminum demand and prices. At the same time, Hongqiao's production costs could increase, given the company will likely start paying government levies in relation to captive power generation from 2019. As such, we expect Hongqiao's...

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