The rating outlook remains stable.

"Sinochem HK's operating profit of HKD4.4 billion was broadly in line with our expectation and was driven by the stable oil and gas operation, improved profitability at Sinofert (unrated), and on-track sales execution at Franshion," says Jiming Zou, Moody's Lead Analyst for Sinochem HK.

Profit from the oil and gas operation rose 27% to HKD1.76 billion in 1H on the back of higher gross profit margin from the oil trading business.

The upstream E&P business was stable, despite a slight drop in production from the Peregrino project compared to the end of 2011, which was caused by some problems related to new onsite equipment. Moody's expects the project to continue its ramp up in 2H.

Sinofert, a listed subsidiary of Sinochem HK, maintained its strong market position in the fertilizer distribution and marketing business, particularly potash imports. Its total sales revenue rose 22.01% in 1H, while volumes grew 7.82%.

Profit margin from Sinofert's fertilizer production business grew 12.7% from 9% owing to the improvement in operation efficiency and cost structure.

Moody's also notes that Franshion (Baa3, negative), the listed property subsidiary, recorded contracted sales of HKD13 billion as of August and is on track to achieve its annual sales targets. The performance of Franshion's investment properties is also in line with expectations; EBITDA from its property leasing business rose 11%.

"Sinochem HK's reported debt increased only slightly to HKD68 billion from HKD63 billion as of end-2011, because of a much smaller cashflow used in investment of HKD2.6 billion in 1H versus HKD39 billion in the same period of 2011," says Kai Hu, Moody's Local Market Analyst for Sinochem HK.

As a result, Sinochem's key credit metrics improved. Its adjusted FFO/debt was 11.1% on a last-twelve-month (LTM) basis, compared with 8% in 2011, while EBITDA/interest was 3.3x versus 2.9x.

"Although the financial profile is on the weaker side, it is in line with Sinochem HK's baseline credit assessment (BCA) of ba2," Hu says.

The Baa1 rating continues to factor in a 4-notch uplift based on the likelihood that the Chinese government (Aa3/positive) will provide support in case of need, via Sinochem Group, given Sinochem HK's important role in the country's food security because of its dominant position in the domestic fertilizer industry, particularly in potash imports and off-season fertilizer reserves.

Moreover, Sinochem's immediate parent, Sinochem Group, has injected equity of about HKD1.23billion in Sinochem HK in June 2012.

Sinochem HK has a sound liquidity profile, with consolidated cash balance of HKD15.7 billion as of 30 June, against maturing debt of HKD16.9 billion in the next 12 months. Its status as a state-owned enterprise also ensures its strong access to bank credit from Chinese and foreign banks.

Sinochem HK'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 Sinochem HK's core industry and believes the ratings are comparable to those of other issuers with similar credit risk.

Other factors used in this rating are described in "Analytical Considerations in Assessing Conglomerates," published in September 2007.

Sinochem HK is 98%-owned by the Sinochem Group, and holds the majority of its parent's important assets, including: 1) its overseas exploration and production (E&P) assets; 2) a majority interest in the listed fertilizer company, Sinofert Holdings Limited; and 3) the listed real estate company, Franshion Properties (China) Limited (Baa3/negative).

The Sinochem Group is a central government state-owned enterprise (CGSOE). It is directly owned and supervised by the State Council'sState-Owned Assets Supervision and Administration Commission (SASAC). The group's business focuses on the agricultural, chemical, energy, real estate, and finance sectors. It is one of 16 CGSOEs that have SASAC's approval to conduct real estate business.

The Local Market analyst for this rating is Kai Hu, +86 (10) 6319-6560. Jiming Zou 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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