March 9, 2016 / 2:46 AM / a year ago

Fitch: Acceleration in Capex Plan May Raise Hua Han's Leverage

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, March 08 (Fitch) Fitch Ratings says that Hua Han Health Industry Holdings Limited's (Hua Han, BB-/Stable) leverage may rise substantially over the next 6-12 months because it is bringing forward capex related to hospitals it is building. However, Fitch expects the company to remain in a net cash position, and therefore there is no impact on the rating. Fitch believes Hua Han has accelerated its hospital construction and related equipment procurement in the first half of the financial year ending June 2016 (1HFY16). Net cash declined to HKD3.3bn at end-December 2015 from HKD6bn at end-June 2015, mostly due to higher-than-expected capital expenditure. Fixed asset and deposits for equipment purchases increased by HKD2.9bn in 1HFY16, compared with Fitch's previous capex expectation of HKD800m in FY16 and HKD2bn in FY17. Fitch expects capex to come down from FY17 as some of the spending has been brought forward. The first hospital that Hua Han is building, Liupanshui City Liang Dou People's Hospital, will commence partial operation by June 2016 and full operation by end-2016. Hua Han has three hospitals under planning and construction. Currently there are no plans to expand beyond that, given the high capital requirement and limited market opportunities. The company's leverage profile and credit metrics may come under pressure if the company announces more aggressive plans to invest in hospitals. Hua Han entered the medical services business in late 2014, and management expects this to become the main growth driver going forward. Revenue contribution from medical services rose to 43% of total revenue in 1HFY16 from 12% in FY15. The medical services segment has also expanded in 1HFY16 to include stem cell storage as and hospital division upgrade, from supply chain management previously. The EBIT margin of medical services remained at around 20% in 1HFY16 (22% in FY15). Fitch expects modest growth in supply chain management in FY17-FY19 and new revenue streams to be derived from the newly built hospitals. Hua Han's pharmaceutical products business remains strong. EBIT from the segment rose 9% yoy in 1HFY16 to CNY410m. Revenues dropped by more than 30%, but this was more than offset by a fall in distribution expenses via the base-price sales strategy implemented in 2HFY15, which transferred the majority of distribution costs to distributors in exchange for a discount in the product sales price. Pharmaceutical revenue actually rose 9% yoy in 1HFY16 if Hua Han applied the same base prices to the revenue in 1H15. Contact: Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Yi Zhang Analyst +85 21 5097 3390 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com 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 WEBSITE '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. 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.

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