We expect Tingyi to maintain its dominant domestic market positions (by sales value), which AC Nielsen reported in March 31, 2012, as 56.6% for instant noodles and 41.3% for RTD tea. The company’s market strength provides strong bargaining power over suppliers and distributors. This advantage supports Tingyi’s short cash-conversion cycle and ensures strong working capital management. In addition, Tingyi’s large distribution network ensures good market penetration, provides a strong competitive advantage over the company’s domestic and international peers, and helps to maintain its market lead.
Tingyi’s margins are likely to remain under pressure this year because of fluctuations in raw material prices, which comprise the bulk of production costs. The company has mitigated the risk by continuing to improve production efficiency, including through technological advancements. We also believe the company can better manage the risk than its peers due to its business scale and branding strength.
We expect competition with international and domestic brands to intensify in 2012, particularly toward securing shelf space. The resulting pricing pressure prevents Tingyi from fully passing through rising material costs to customers, which could further strain profitability.
Any missteps in integrating the PepsiCo bottling businesses could undermine Tingyi’s bottom-line performance in 2012. Nevertheless, we believe the company has credible strategies in place to turn around the profitability of the business, particularly through leveraging its strength in distribution. PepsiCo’s Chinese bottling business has reported four consecutive years of net loss.
Tingyi’s disciplined financial management and stable cash flow generation support its financial risk profile. The company prudently managed its balance sheet and controlled leverage during its expansion period. This was shown in 2007-2011, when the company maintained a ratio of total debt to EBITDA of 0.5x-1.6x and a ratio of total debt to total capital of 16.9%-34.0%, which are good levels for the rating category. We expect the company’s cash flow generation to remain strong and sustainable over the next two to three years. In our base-case projection, we expect Tingyi’s total debt to EBITDA ratio to stay about 1.0x-2.0x and the ratio of total debt to total capital to be 30%-40% over the next few years following the proposed issue of senior unsecured notes.
Tingyi has “adequate” liquidity, as defined in our criteria. The company’s sources of liquidity, including cash and available facilities, will exceed its uses by 1.2x or more over the next 12-24 months (excluding the proposed bond issuance). Our liquidity assessment incorporates the following factors and assumptions:
-- Sources of liquidity include unrestricted cash of about US$1.13 billion as of March 31, 2012, and funds from operations (FFO). The company also has about US$590.0 million in committed undrawn banking facilities as of that date.
-- Uses of liquidity include committed capital expenditure, working capital needs, debt repayments, and dividend payouts (it typically maintains a payout policy of 50%) over the next 12 months. As of March 31, 2012, Tingyi has short-term debt of US$822.9 million.
-- Net sources will remain positive even if EBITDA declines by 30%.
-- Tingyi has good standing in the credit markets, particularly with Japanese and Taiwanese banks.
The stable outlook reflects our expectation that Tingyi will make progress in integrating the PepsiCo bottling business, and therefore will gradually broaden its brand diversity. We also expect the company to maintain satisfactory profitability, generate positive free operating cash flows, and maintain conservative leverage such that the total debt-to-EBITDA ratio does not exceed 2x.
We are unlikely to upgrade Tingyi in the next few years. We would consider a higher rating if the company increased the number of brands and products, and geographical diversity, while demonstrating greater resilience in terms of profit margins. An upgrade would also be dependent on the company retaining a very strong market position in its key products and maintaining a conservative financial risk profile (such as “intermediate”).
We could lower the rating if we expect Tingyi’s ratio of total debt to EBITDA to exceed 2.0x on a sustained basis. This could happen if the company fails to maintain its market position, poorly executes the PepsiCo integration or its growth strategy, or undertakes a more aggressive capital expenditure plan.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Rating Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008