Xinhua Far East Puts Fuyao Group Glass Industry Co Ltd on Review For Possible Upgrade

Xinhua Far East China Ratings  ("Xinhua Far East") today placed the BB+ issuer credit rating of Fuyao  Group Glass Industry Co Ltd ("Fuyao" or "the company", SH A 600660) on  review for a possible upgrade.

The rating action was prompted by expectations that Fuyao's capital  expenditure will slow and its operating cash flow will improve as a result  of its strengthening position in the domestic and global auto glass  markets. A proposed private placement to Goldman Sachs would improve its  debt repayment capacity, providing further support to its rating profile.  The company has now completed major production bases for the auto  producer market, with its investments in auto glass capacity likely to slow  after its Beijing and Guangzhou production bases are put into operation in  2007. Still, there are some concerns over ongoing capital expenditure in  its float glass lines in Hainan Province, especially considering the  company's historically aggressive investment record.

Its cash flow status has improved, with the gap between CFO and CFI  (outflow) narrowing over the past nine quarters. This trend is expected to  continue as a result of the company's strengthening market position.  Revenues from its auto glass segment, which accounted for 74.3% of total  revenues in 2006, rose from RMB1, 064.2 million in 2002 to RMB2, 888.9  million in 2006. The growth of this segment resulted not only from domestic

sales but also from its global OEM business. Domestic sales have grown as a result of growing auto sales and its leading market share. In the global  OEM field, Fuyao has passed the verification process of major world-class  auto manufacturers, including Ford and GM. Despite tough downstream  competition, wavering domestic demand for sedans and RMB appreciation, its  profit margins have remained comparatively stable, with its operating  efficiency improving slightly.

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