TEXT-S&P summary: Sound Global Ltd.

(The following statement was released by the rating agency)

Nov 23 -

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Summary analysis -- Sound Global Ltd. ----------------------------- 23-Nov-2012

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CREDIT RATING: BB-/Stable/-- Country: China

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Credit Rating History:

Local currency Foreign currency

06-May-2012 BB-/-- BB-/--

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Issues:

Rating Rating Date

US$150 mil 11.875% nts due 08/10/2017 B+ 19-Jul-2012

Rationale

The rating on Sound Global Ltd. reflects the company's exposure to

intensifying competition in China's highly fragmented wastewater treatment

industry. Sound Global's limited revenue base and the risks from the company's

overseas engineering, procurement, and construction (EPC) projects also

constrain the rating. Favorable industry prospects, and Sound Global's revenue

visibility, track record, and low debt leverage temper these weaknesses. We

assess the company's business risk profile as "weak" and its financial risk

profile as "aggressive."

We expect the competition in China's water and wastewater treatment industry

to increase over the next 12-24 months. Sound Global's revenue base and

privately owned status could limit its ability to compete with large

government-related entities with better access to capital and close

relationships with local governments. Local governments are the main customers

of water and wastewater treatment projects. A significant portion of these

projects uses the build, operate, and transfer (BOT) model, which requires

significant capital investment upfront.

Sound Global is likely to face heightened country risk, execution risk, and

project concentration risk when it expands to overseas EPC projects. The

company has a limited record in overseas EPC projects; it has undertaken two

such projects in the past three years. Overseas EPC projects also tend to be

larger than domestic ones in terms of contract value. Sound Global aims to

engage in one or two overseas EPC projects every year to sharpen its execution

capability.

Strong policy support from the Chinese government is likely to boost demand

for the country's water and wastewater treatment industry. The government has

planned significant investments and tightened water discharge standards to

address severe water shortage and water pollution. We expect water and

wastewater treatment solution providers, such as Sound Global, to benefit

from: (1) an increase in treatment capacity in both urban and rural areas; (2)

an upgrade of existing treatment facilities to meet tightened discharge

standards; and (3) the governments' and industrial corporations' outsourcing

of operations and management of treatment facilities.

In our view, Sound Global's backlog of EPC projects provides good revenue

visibility for the next 12-24 months. Recently, the company won several

projects including sewage treatment plant network projects in 14 rural areas

in Siyang county and a BOT project in municipal wastewater treatment upgrading

in Hangcheng city in Shaanxi province. Sound Global's order backlog remains

stable. As of Sept. 30, 2012, the order book has a contract value of about

Chinese renminbi (RMB) 2.6 billion. The company's record in domestic EPC

projects and its integrated platform--including design, manufacturing, as well

as operation and management--help to moderate industry competition.

In our base-case scenario, we expect Sound Global to continue to grow over the

next two years. We also expect the company's ratio of adjusted debt to EBITDA

to be about 2.5x-3.0x in the next 12 months. Nevertheless, the ratio could

temporarily and slightly exceed 3x if Sound Global cannot effectively buy back

its outstanding convertible notes of RMB622 million as of Sept. 30, 2012, from

the secondary market. Still, considering the company's large cash position, we

expect its debt repayment ability in the next 12 months to remain adequate.

Sound Global's EPC businesses do not require high cash expenditure. The

company tends to maintain high cash balance that can sustain its growth in the

BOT business. It also has some flexibility to manage the growth in BOT

projects and cash flow adequacy.

Liquidity

Sound Global's liquidity is "adequate," as defined in our criteria. We expect

the company's sources of liquidity to cover its uses by more than 1.2x in the

next 12 months. Our liquidity assessment is based on the following factors and

assumptions:

-- Sources of liquidity include cash and funds from operations of RMB479

million.

-- As of Sept. 30, 2012, Sound Global has cash and cash equivalent of

about RMB2,617.8 million, short-term loans of about RMB345.9 million, and

outstanding convertible notes of RMB622 million.

-- Uses of liquidity include planned capital expenditure, working capital

needs, and debt repayments. The company will also need funds for dividend

distribution.

-- We expect net sources to remain positive even if EBITDA declines by

15%.

Outlook

The stable outlook reflects our expectation that Sound Global will maintain a

stable to steadily rising backlog of domestic EPC projects. We also expect

prospects for the water and wastewater treatment industry to remain favorable.

A steadily growing business and consistent financial management are also

likely to help the company maintain its financial risk profile.

We could lower the rating if any of the following occurs:

-- Sound Global's backlog of EPC projects significantly deteriorates.

This could happen if newcomers or large peers become aggressive in expanding

market share. Difficulty in obtaining external funding for its BOT projects

could also lower the company's backlog of EPC projects.

-- Sound Global's financial strength weakens significantly such that its

ratio of adjusted total debt to EBITDA is more than 4x for a sustained period.

A significant increase in the company's debt and its inability to maintain

steady business growth could cause such deterioration.

-- Sound Global's funding capability weakens materially due to

heightening risks in overseas EPC projects.

The likelihood of an upgrade in the next 12 months is limited. Nevertheless,

we could raise the rating if: (1) Sound Global expands its revenue base while

maintaining its fair diversification and current leverage; (2) the company

builds up its record in overseas EPC projects; and (3) it significantly

increases the share of recurring revenue to total revenue.

Related Criteria And Research

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,

Sept. 18, 2012

-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Source: http://news.yahoo.com/text-p-summary-sound-global-ltd-075709064--sector.html

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