Reuters logo
Fitch Publishes China-Based BlueFocus at 'B+'; Rates Proposed Notes 'B+/RR4(EXP)'
November 20, 2017 / 6:29 AM / 21 days ago

Fitch Publishes China-Based BlueFocus at 'B+'; Rates Proposed Notes 'B+/RR4(EXP)'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 20 (Fitch) Fitch Ratings has published China-based BlueFocus Communication Group Co. Ltd's (BlueFocus) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'B+'. The Outlook is Stable. The agency has simultaneously assigned an expected 'B+(EXP)' with a Recovery Rating of 'RR4' to the proposed senior unsecured notes. The notes are issued by its wholly owned subsidiary, Blue Skyline Communication Limited, and unconditionally and irrevocably guaranteed by BlueFocus. The 'RR4' Recovery Rating on the notes reflects Fitch's bespoke calculations, which show recovery in the event of a default would be average, at 31%-50%. The final rating of the notes is contingent upon the receipt of final documents conforming to information already received. The proceeds from the proposed senior secured notes will be used for equity investment, refinancing of interest-bearing debt and general corporate purposes. KEY RATING DRIVERS Strong Position in China: BlueFocus was the third-largest advertising agency in the Chinese market and the largest public relations agency in Asia-Pacific in 2015 and 2016, according to R3 Worldwide and PRWeek, respectively. The company is also the largest domestic marketing communications services group. However, it is still significantly smaller than global market leaders such as WPP plc (BBB+/Stable), Interpublic Group of Companies, Inc. (IPG, BBB/Positive), Omnicom Group Inc., Publicis Groupe SA and Dentsu Inc. Rapid Digital Growth: We expect BlueFocus to remain a main beneficiary of the steady growth in China's advertising market and greater advertiser spending on mobile formats. Mobile is already the leading ad spend channel in the country. iResearch forecasts mobile advertising to grow at a CAGR of 40% in 2016-2019, to account for 77% of China's total internet ad spend in 2019. We also expect mobile programmatic advertising to be more mainstream in China's online display advertising, supporting BlueFocus's demand-side platform growth. Weaker Margins and Cash Generation: BlueFocus's weaker profitability and free cash flow (FCF) generation weigh on its ratings when compared with the investment-grade global majors. Its operating EBITDA margin was 7.0% in 2016, versus WPP's 18.3% and IPG's 14%. The lower profitability was due to greater competition in China's agency business and higher revenue contribution from digital advertising and outbound business. We expect BlueFocus's margins to improve gradually, driven by rising programmatic buying revenue and cost savings from centralised media buying. However, its wide margin gap against the leading global peers may remain until the company has achieved much larger scale and broader geographic diversity. Even if leverage were lower, we would be likely to rate BlueFocus at least one rating category lower than WPP and IPG. High Leverage: The ratings reflect Fitch's expectations that BlueFocus's funds flow from operations (FFO) adjusted leverage may remain over 5.0x in the next two to three years. This measure is at least 1x (one turn) higher than the debt/EBITDA measure used by management, as it includes adjustments for tax paid, capitalisation of operating leases, and for some for non-cash items. The company's FFO-adjusted leverage of 8.3x in 2016 was much higher than the average of around 3.5x for the top-four global advertising holding companies. We expect EBITDA growth to re-accelerate, however total debt may remain high and FFO adjusted leverage may stay above 5.0x in the next two to three years, as capex on software systems and technology knowhow will be high and M&A may consume cash. We expect total adjusted debt to exceed CNY10 billion by end-2018 (2016: CNY7.3 billion). Acquisitive in Nature: The smaller scale of BlueFocus compared with the global majors may affect its ability to deleverage following large M&A transactions. However, management's commitment to a mid-term debt/EBITDA target of under 4x - and its track record in identifying strategic opportunities and avoiding expensive bidding wars, coupled with re-acceleration of EBITDA growth - should help restore credit metrics over the medium term. BlueFocus has been built through acquisitions, as was the case with global peers. The company will remain acquisitive, as it will continue to gain new customers, new skills, and expand overseas. It will also buy out minority stakes in its key subsidiaries, which is credit positive. Nevertheless, we believe that despite the company's strengths, medium-term gearing target of debt/EBITDA 4x - which equates to over 5x for Fitch's preferred FFO adjusted leverage metric - is too high to rate BlueFocus in the 'BB' category. Smaller Scale; Lower Geographical Diversity: BlueFocus's ratings reflect its smaller scale and lower geographical diversity versus the investment-grade global majors - WPP, Omnicom, Publicis, IPG and Dentsu. Its scale is approaching that of MDC Partners. In 2016, most of BlueFocus's revenue was derived from China, with only 13% from overseas. International revenue accounted for 38% of its 2016 revenue, including outbound business from Chinese advertisers on Facebook and Google, but outbound business has very thin margins. DERIVATION SUMMARY BlueFocus's ratings reflect its strong market position in the marketing communications services sector in China, and the steady growth of the domestic advertising services. However, we expect leverage to remain high due to a greater spend on capex and potential future acquisitions. The ratings also reflect the company's scale and weaker profitability than the leading global advertising holding companies with investment-grade ratings, such as WPP (BBB+/Stable) and IPG (BBB/Positive). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue CAGR of 31% in 2017-2020, driven by mobile and social advertising in China - gradual improvement in EBITDA margin, driven by favourable changes in sales mix and cost savings - annual capex of some CNY280 million in 2017-2020 - annual spending of CNY1.2 billion-2.3 billion on M&A in 2017-2020 - dividend payout ratio of 10% in 2017-2020 Recovery rating assumptions: - post-default operating EBITDA of CNY725 million - going-concern EBITDA multiple of 6.0x, reflecting BlueFocus's strong market position in China, compared with the median broadcasting and media multiple of reorganisation enterprise value/forward EBITDA of 5.5x - 10% administrative claims - issuance of proposed US dollar unsecured notes Based on our calculation of the going-concern value, after administrative claims of 10%, we estimate the recovery rate of the offshore senior unsecured debt in the event of a default to be 37%, which corresponds to a Recovery Rating of 'RR4'. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - significant increase in scale and geographical diversification - operating EBITDA margin sustained above 10% - FFO adjusted leverage sustained below 4.0x - FFO fixed coverage sustained above 4.0x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - substantial weakening of the market positions of its key products and services - significant M&A that negatively affect the operations or the business profile - operating EBITDA margin sustained below 7.0% - FFO adjusted leverage sustained above 5.5x - FFO fixed coverage sustained below 3.0x LIQUIDITY Adequate Liquidity: BlueFocus's readily available cash of CNY1.8 billion at end-2016 was insufficient to meet its short-term debt maturities of CNY3.1 billion. Nevertheless, its liquidity position is strengthened by the CNY1.7 billion equity proceeds received in February 2017. In addition, the company had unutilised credit facilities of CNY640 million at end-June 2017. It also received approval to issue CNY2.5 billion of short-term notes, of which CNY500 million were issued in early August 2017. Successful issuance of the proposed US dollar bond will improve liquidity. FULL LIST OF RATING ACTIONS BlueFocus Communication Group Co. Ltd -- Long-Term Foreign-Currency IDR published at 'B+' with a Stable Outlook -- Long-Term Local-Currency IDR published at 'B+' with a Stable Outlook Blue Skyline Communication Limited -- Proposed US dollars senior unsecured notes assigned an expected rating of 'B+/RR4(EXP)' Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F., Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 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#solicitation 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below