August 24, 2017 / 8:13 AM / in a year

Fitch Affirms Yestar's 'BB-' Ratings; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 24 (Fitch) Fitch Ratings has affirmed Yestar International Holdings Company Limited's (Yestar) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BB-'. The Outlook on the IDR is Stable. Fitch has also affirmed Yestar's USD200 million 6.9% senior unsecured notes due 2021 at 'BB-'. Yestar's ratings reflects the company's high exposure to China's rapidly growing in-vitro diagnostics (IVD) market, an established partnership with IVD industry leader Roche Diagnostics, a strong foothold in IVD distribution across important markets in eastern and southern China, and strong free cash flow (FCF) generation. The rating headroom has shrunk after a few acquisitions that resulted in higher leverage, but Fitch expects Yestar to be able to maintain FFO adjusted leverage below 2.5x, the level at which Fitch would consider negative rating action. KEY RATING DRIVERS IVD Business Drives Growth: Yestar entered the IVD market in 2014 after acquiring two IVD distributors in eastern China that had established partnerships with Roche Diagnostics. Since then, Yestar has acquired three more distributors in southern China. China's IVD market is expanding rapidly due to strong demand, and faces low cyclicality. Fitch estimates that the IVD business will contribute around 75% of Yestar's EBITDA in 2017 and that this proportion will continue to rise. Further Acquisitions Possible: Yestar recently announced that it was looking into potential new targets. The management has said the company is interested in expanding into new regions, such as northern China. We have not yet factored these acquisitions into our forecasts as the size and timing are uncertain. Yestar's ratings may be negatively affected if the company makes a large acquisition and funds it with cash/debt. Leverage Rising: Yestar's leverage has risen after the acquisitions in the past few years. Yestar acquired three more distributors at the beginning of 2017 and is due to pay for the remaining 30% stake in IVD distributor Anbaida in 2018. Fitch expects FFO adjusted leverage to range between 2.0x and 2.5x, which Fitch views as acceptable, although the rating headroom at the current level is very limited. Fitch's leverage expectation assumes no further acquisitions. Traditional Imaging Business Weak: Yestar's traditional business of distributing imaging equipment is mature and has limited growth prospects. Fitch previously expected this segment to be relatively stable, but its recent performance has been disappointing, with revenues declining by 11% in 2016 and a further 20% in 1H17. DERIVATION SUMMARY Yestar's ratings are supported by its exposure to China's rapidly growing IVD market, an established partnership with Roche Diagnostics, and strong FCF generation. These strengths are offset by the company's small operating scale, limited track record in the IVD business, and M&A risk. Its credit profile is comparable to peers of similar scale in the diversified services and diversified manufacturing sectors, such as eHi Car Services Limited (BB-/Negative) and Hilong Holding Limited (BB-/Negative). Yestar has a slightly smaller operating scale and a weaker financial profile than 361 Degrees International Limited (BB/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Mid-teen revenue growth for IVD business and 20% EBITDA margin in 2018-2019 - Revenue for the traditional imaging business to decline 0%-5% in 2018-2019 - Company to acquire remaining 30% interest in IVD distributor Anbaida in 2018 - No further M&A assumed RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Significant increase in operating scale, brand partners and geographic diversification while keeping FFO adjusted net leverage below 2.5x on a sustained basis Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage above 2.5x on a sustained basis - EBITDA margin below 15% on a sustained basis (2016: 17.6%) - Sustained weakness in existing businesses LIQUIDITY Sufficient Liquidity: As of end-June 2017, Yestar had CNY679 million of cash and cash equivalents and more than CNY100 million in undrawn banking facilities, which was more than enough to cover its short-term debt of CNY244 million. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Li Chen Analyst +86 21 5097 3009 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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