August 4, 2017 / 1:26 AM / a year ago

Fitch Assigns Huiyuan Juice First-Time 'B+' Rating; Rates Bonds

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 03 (Fitch) Fitch Ratings has assigned juice producer China Huiyuan Juice Group Limited a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. Fitch has also assigned a senior unsecured rating of 'B+' with a Recovery Rating of 'RR4'. In addition, Fitch has assigned the proposed US-dollar senior unsecured notes to be issued by Huiyuan Juice an expected rating of 'B+(EXP)' with a Recovery Rating of 'RR4'. The proposed notes are rated at the same level as Huiyuan Juice's senior unsecured rating as they constitute its direct and senior unsecured obligations. The final rating on the proposed US dollar notes is contingent upon the receipt of final documentation conforming to information already received. Huiyuan Juice's ratings are supported by the company's strong brand name and long operating history in China's juice market and its efforts in expanding and diversifying its product range internally and through acquisitions. The company's ratings are constrained by its volatile top line performance, relatively small business scale and high leverage. Fitch also views the extended trade receivable days at end-2016 as a credit weakness. KEY RATING DRIVERS Leading Chinese Juice Producer: Fitch sees Huiyuan Juice's strong brand, leading market position and integrated operations as its key competitive advantages. Huiyuan Juice has produced and sold juice products in China for more than 20 years, with a dominant market share in 100% juice and juice nectar products in China over the past 10 years. The company also has an integrated business model that encompasses upstream and downstream juice production, which allows for greater bargaining power and lower seasonal volatility. Domestic and International Expansion: In 2015, Huiyuan Juice acquired 100% of Suntory (Shanghai) Foods Co., Ltd and 50% of Suntory (Shanghai) Beverage Co., Ltd for CNY74.5 million. The acquisition enabled Huiyuan Juice to take control of Suntory's non-alcoholic beverage business in China. Huiyuan Juice also agreed in 2017 to establish a joint venture company in Malaysia with Yeo Hiap Seng Limited, which will expand its operations in Malaysia and south-east Asia. Fitch believes the two deals will help diversify Huiyuan Juice's business portfolio, although the company will face execution risk, as both businesses are at early stages of development. Large Trade Receivables: Huiyuan Juice reported negative operating cash flow in 2016, mainly due to a sharp rise in trade receivables as the company offered longer payment terms to its distributors to boost product sales. Trade debtor days was 194 days at end-2016, up from 109 days at end-2015. Fitch sees the extended working capital cycle as a credit weakness. However, the company has taken steps to collect the receivables since the beginning of 2017, and management said that the trade receivable amount has been reduced by end-June 2017. Limited Capital Expenditure Requirements: The capacity utilisation rates of Huiyuan Juice's production facilities have been low for many years due to over-expansion in the past. Huiyuan Juice has been disposing of some of its idle and inefficient capacity, which raised around CNY173 million in 2014, CNY1.01 billion in 2015 and CNY468 million in 2016. As a result, Fitch does not expect major capital expenditure in the near future. The company is also exploring international opportunities, which may allow the company to relocate idle production lines to overseas facilities. High Leverage, Moderate Coverage: Huiyuan Juice posted moderately strong FFO fixed charge coverage of 3.0x at end-2016, but its leverage - measured by FFO-adjusted net leverage - was moderately high at 4.8x. Fitch believes that the company would maintain the current coverage ratio at around 3x for the next three years. We also expect the company's leverage to remain at around 5x, driven by single-digit revenue growth, moderate margin and large working capital needs. DERIVATION SUMMARY Huiyuan Juice's financial profile is weaker than that of international food and beverage peers rated at 'BB' or above. Within our China consumer portfolio, eHi Car Services Limited (eHi, BB-/Negative) is similar to Huiyuan Juice in size, but eHi has lower leverage and stronger coverage than Huiyuan Juice. The company's financial metrics are more in line with peers rated in the 'B' category. Compared with Agri Business Holding Miratorg LLC (B+/Stable), Huiyuan Juice has smaller EBITDA and higher leverage, but the two companies share similar coverage ratios. Miratorg's ratings is capped at the 'B' category due to its corporate governance and the operating environment in Russia, which explains its better than 'B+' rated peer financial metrics. Compared with 'B' rated peers such as Premier Foods plc (B/Negative) and Yasar Holding A.S. (B/Stable), Huiyuan Juice has similar EBITDA size but stronger FFO margin and FFO fixed charge coverage. Huiyuan Juice has similar EBITDA size and coverage compared with Labeyrie Fine Foods SAS (Labeyrie, B-/Stable), but Fitch believes Huiyuan Juice's strong market position in the China juice market warrants a higher rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth to remain around 7% in 2017 and 2018. - EBITDA margin to remain close to 16% in 2017 and 2018. - Capital expenditure to reduce to CNY200 million per annum, as the company has no major new capex plan. - No common dividend payout; and no share repurchase. Key Recovery Rating Assumptions: - The recovery analysis assumes Huiyuan Juice would be liquidated in a bankruptcy rather than continue as a going-concern. - Recovery analysis applied a haircut of 50% for CNY3.18 billion of receivables, a 50% haircut for CNY1.22 billion of inventory and a 50% haircut for all property, plant and equipment, affiliates and minority interest and other assets, In Fitch's view, Huiyuan Juice's account receivables are more difficult to recover compared with those of other companies, and hence assigns lower recovery rate on this. - Pledged cash of CNY200 million against bank borrowings is considered as available to creditors. - 10% administrative claims are applied on the liquidation value. - Offshore secured debts and unsecured debts of Chinese operating entities move ahead of offshore unsecured debt holder in the distribution waterfall; - Based on our calculation of the adjusted liquidation value after administrative claims, we estimate the recovery rate of the offshore senior unsecured debt to be 54%, The Recovery Rating of Huiyuan Juice is capped at 'RR4', which reflects average recoverability for offshore creditors in China. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Substantial increase in revenue - FFO fixed charge coverage sustained above 5x (2016: 3.0x) - FFO-adjusted net leverage sustained below 3x (2016: 4.8x) Developments That May, Individually or Collectively, Lead to Negative Rating Action - EBITDA margin sustained below 15% (2016:17.8%) - FFO-adjusted net leverage sustained above 5x (2016:4.8x) - Substantial decrease in revenue - Deterioration in working capital flow, which will be evident from longer account receivable days LIQUIDITY Adequate Liquidity: Huiyuan Juice had CNY2.1 billion in unrestricted cash and CNY220 million in available undrawn bank facilities at end-2016. These are sufficient to meet its short-term debt repayment obligation of CNY1.75 billion. However, around 70% of Huiyuan Juice's debt will mature in 2018, and the company is likely to refinance these debts with offshore bond issuance and roll over of its existing bank facilities. 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 5067 3009 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 13 July 2017 Summary of Financial Statement Adjustments - Restricted cash pledged to bank loans are treated as readily available Outstanding bonds are adjusted to face value Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 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. 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