The outlook for the ratings is negative, reflecting Winsway's deteriorating performance in a challenging year.

Although operating margin likely will improve in 2H 2012, Moody's expects the improvement to be limited and therefore insufficient to offset the loss recorded in 1H 2012. Winsway's stand-alone financial profile will likely stay under pressure for the rest of 2012.

But the negative impact of the down-cycle in coal trading has been mitigated by Aluminum Corporation of China Limited's (Chalco) 29.9% investment in Winsway. Shareholders in both companies have approved the investment. It now awaits regulatory approval by China'sMinistry of Commerce and the National Development and Reform Commission.

Chalco is a Chinese state-owned enterprise and is the largest producer of alumina, primary aluminum and aluminum fabrication products in China.

Moody's sees various benefits from the Chalco investment.

Firstly, Chalco is seeking to diversify into other resources to achieve the full integration of its coal and aluminum operations. In this context, Winsway offers Chalco long-term strategic value, including an established transportation network on the Sino-Mongolian border, solid relationships with Mongolian miners, and access to upstream resources abroad.

Secondly, Winsway announced on 22 August 2012 the formation of a 25-year strategic alliance agreement with Lung Ming Group, a major Mongolian iron ore producer. Such a new source of revenue could be a further attraction to Chalco.

If Chalco concludes its investment, it will become the single largest shareholder in Winsway and the financial resources available to Winsway will improve. Given Chalco's strong relationship with its banks, Winsway will have better access to funding.

Moody's will monitor the progress of Chalco's investment and review the impact on Winsway's future business strategy and financial position, once it is approved.

Moody's further notes that Winsway has emphasized cash conservation which is prudent in the current down-cycle. But it has resulted in short-term losses.

Winsway recorded a HKD270 million operating loss for its core coal trading business -- including a HKD100 million inventory impairment -- in 1H 2012. During the first half, the company also disposed of its high-cost seaborne coal inventory and accelerated cash collections.

Winsway's average coal ASP dropped by 9% year on year in 1H 2012, while costs increased by 14%. As a result, Moody's estimates that unit gross profit per ton declined substantially to below HKD20 per ton in 1H 2012 from over HKD250 per ton a year ago.

Nonetheless, Moody's expects Winway's core coal trading business to report a mild margin recovery in 2H 2012, following the disposal in 1H 2012 of its high-cost seaborne coal inventory.

Total inventories had decreased 33% to 2.6 million tons in June 2012 from 3.9 million tons in December 2011. Over 88% of its remaining inventory is low-cost Mongolian coking coal, which could help its unit gross profit recover to round HKD70-HKD90 per ton in 2H 2012. This figure would be better than the estimated gross profit achieved in 1H 2011, but substantially below the peak of 1H 2011.

Additionally, Grand Cache Coal Corporation (GCC) contributed a HKD185 million pre-tax loss which included costs for the debt financing of its acquisition. Winsway also charged HKD62 million as a one-off expense on the GCC acquisition.

However, we expect GCC's operations to ramp up in 2H 2012, and GCC's contribution to Winsway's pre-tax losses will decrease.

We consider that the company's liquidity will remain fairly manageable in the next 12 months.

As of June 2012, the company had a total cash balance of HKD3.9 billion, covering 90% of its HKD4.3 billion in short-term debt (including in HKD2.8 billion in trade & bills payable). Around RMB780 million -- out of short-term debt of HKD4.3 billion -- represented the first-year amortization of part of the USD350 million in acquisition debt for GCC. The loan was from China Mingshen Bank.

The company's pro-active cash preservation strategy is working well and should provide a good liquidity buffer in the next 6-12 months. Operating cash flow amounted to HKD1.0 billion in 1H 2012, in spite of the operating loss, mainly thanks to the aggressive disposal of its coal inventory.

Further cash conservation will come from Winsway's plan to reduce its inventory from 2.6 million tons as of June 2012 to 1.0 million tons by the end of 2012. At the same time, the company will keep capital expenditures minimal.

Winsway Coking Coal Holdings Limited's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Winsway Coking Coal Holdings Limited's core industry and believes Winsway Coking Coal Holdings Limited's ratings are comparable to those of other issuers with similar credit risk.

Winsway Coking Coal is one of the largest suppliers of coking coal in China, and obtains its supplies from Mongolia and other international markets. It also processes coal and provides logistics services to its customers, mainly Chinese steel makers and coke plants, through its integrated coking coal supply chain in China. It listed on the Hong Kong Stock Exchange in October 2010, and is 49.7%-controlled by its founder and CEO Wang Xingchun.

Alan Gao Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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