April 12, 2017 / 3:29 AM / 5 months ago

Fitch Affirms Want Want at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, April 11 (Fitch) Fitch Ratings has affirmed Want Want China Holdings Limited's (Want Want) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook on the IDR is Stable. Fitch has also affirmed the rating on the USD600 million senior unsecured notes issued by wholly owned subsidiary Want Want China Finance Limited, and guaranteed by Want Want, at 'A-'. The ratings are supported by Want Want's leadership in select food product categories and a solid financial profile. Product concentration could be a weakness over the longer term, as growth in the packaged food market in China slows and competition increases. KEY RATING DRIVERS Solid Financial Profile: Fitch expects Want Want to continue to generate positive FCF in 2017, driven by stable working capital and low capex requirements. We believe the company will maintain a net cash position by paying dividends and buying back shares only from FCF, consistent with its previous action. Want Want has maintained a strong financial profile over the past six years, with high profitability, strong cash flow generation and a consistent net cash position. Dominant Position, Niche Products: Want Want is one of the most recognised packaged food brands in China. Its key products - rice crackers, flavoured milk, soft candies, popsicles and ball cakes - dominate their respective niche markets. The company has demonstrated significant pricing power and an ability to defend its margins through the cycle. The company has kept EBIT margins well above 15% over the past six years. High Product Concentration: Fitch believes that Want Want's heavy reliance on several core products is one of its key business risks. Want Want has a limited product portfolio compared with global peers rated in the 'A' category. Its key product, Hot Kid Milk, accounted for over 40% of total revenue in 2016. Fitch believes revenue growth over the longer term will depend on Want Want's ability to innovate and launch new products. Revenue reported a decline of 8% in 2016, driven by a 13% drop in the dairy segment and representing a consecutive decline since 2014. However, Fitch does not expect the revenue decline to accelerate in 2017 as Want Want is launching new products, widening its brand portfolio, and expanding its distribution network. Necessary Brand Investment: Fitch expects the EBITDA margin to narrow in 2017 but still be maintained at a level in line with the company's historical average, after its EBITDA margin widened by 3.3pp to 28.3% in 2016. The gross margin achieved a 10-year high of 47.8% due to price declines in major raw material inputs, but several inputs have seen rising prices since 2H16. Furthermore, Fitch anticipates operating expenses will increase as sales staff and advertising are necessary to develop its new brand and product initiatives. DERIVATION SUMMARY Want Want's scale is much smaller than its international peers, and has weaker geographical and product diversification. However, the company has a strong financial profile, with higher profitability, strong cash flow generation and a sustained net cash position. Its closest peer in terms of EBITDA size is New Zealand's Fonterra Co-operative Group Limited (A/Stable), which is also one of the key vendors of Want Want. Fonterra has a stronger market leadership position, while Want Want compares favourably in terms of better diversification in product mix, wider margin, stronger cash generation and a sustained net cash position. No Country Ceiling, parent/subsidiary or operating environment aspects have an impact on the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Flat revenue growth for most divisions in 2016-2019; for dairy products, mid- to high-single-digit revenue decline in 2017-2018 - Gross margin of 45%-46% (2016: 47.8%) in 2017-2019 to take into account higher input costs - EBITDA margin of 25%-26% (2016: 28.3%) in 2017-2019 with higher selling expense as percentage of revenue due to investment in new brands and products - Capex of CNY800 million in 2017-2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Negative growth of key products for a sustained period - Failure to develop new products with meaningful revenue contribution - EBIT margin sustained below 18% - Failure to maintain a net cash position Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - No positive rating action is envisaged over the next 12 months, given the limited operating scale and lack of portfolio diversification. LIQUIDITY Ample Liquidity: Want Want had CNY12 billion in cash and cash equivalents and sufficient undrawn uncommitted bank facilities totalling CNY8 billion at end- 2016, compared with its debt balance of almost CNY10 billion (of which CNY4 billion is current borrowings). Fitch expects Want Want to maintain a net cash position and continue to generate positive FCF in 2017, supported by a stable working-capital cycle and low capex requirements. Want Want will continue to strike a balance between dividend payment and share buybacks with any excess FCF. Contact: Primary Analyst Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Yee Man Chin Director +852 2263 9696 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 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 Criteria for Rating Non-Financial Corporates (pub. 10 Mar 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. 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