September 29, 2016 / 12:52 PM / 10 months ago

Correction: Fitch Assigns Yestar First-Time 'BB-' Ratings; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 29 (Fitch) (This announcement replaces the one published on 29 August 2016 to add the Dodd-Frank Rating Information Disclosure Form that was missing, and include the name and address for the Fitch office of the primary analyst.) Fitch Ratings has assigned Yestar International Holdings Company Limited (Yestar) a Long-Term Issuer Default Rating (IDR) of 'BB-' and senior unsecured rating of 'BB-'. The Outlook is Stable. 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 eastern China markets, stable profit contribution from its mature imaging business with Fujifilm, and low FFO net leverage and strong free cash flow (FCF) generation compared with other 'BB-' peers. The Stable Outlook reflects Fitch's expectation that Yestar's profitability in its IVD and imaging businesses will remain stable and it will maintain low leverage ratios. KEY RATING DRIVERS Steadily Growing IVD Business: Yestar entered the IVD market in China in 2014 and has acquired two IVD distributors that have established partnerships with IVD leader Roche Diagnostics. The distributors also have long-term relationships with hospitals, stable profitability, and a strong market position in distributing Roche-branded IVD products across eastern China. China's IVD market is expanding rapidly due to strong demand, and faces low cyclicality. Fitch expects IVD to account for around 80% of Yestar's total EBIT in 2016 and will be the company's main growth driver. Imaging Business Stable: Fitch expects profit contribution from Yestar's business of distributing imaging equipment to remain stable in the near term despite limited top-line growth. The imaging segment is a mature business with firm customer base, established distribution networks and minimal capex requirements. Fitch believes that Yestar's imaging business will provide stable cash flows that support its rating. Increased Working Capital Demand: Fitch expects Yestar's working capital requirements to increase significantly as IVD takes up a larger part of Yestar's business. Yestar's accounts receivable days for local hospitals stretch from four to six months while accounts payable days to supplier Roche Diagnostics is significantly shorter. In comparison, Yestar's credit terms with imaging products supplier Fujifilm are much more lenient than the credit terms Yestar offers to its imaging customers. Execution and Integration Risks: Yestar has been operating its newly acquired IVD business for less than two years, and has yet to complete the progressive acquisition of 100% of each of the IVD distributors. Execution and integration risks, such as preserving its existing customer base and being able to obtain new customers, remain significant, but Fitch believes that Yestar's successful track record in running its imaging distribution business, the high cost of switching IVD systems for hospitals, and Roche's strong brand name in IVD, will reduce the likelihood of Yestar failing to maintain the existing business model. Strong Financial Profile: Yestar has previously consistently been in a net cash position due to strong cash flow from the imaging distribution business and low operating leverage. Fitch expects Yestar's FFO net leverage to peak at 2.3x in 2018 as it gradually completes the acquisitions of the stakes it does not already own in the IVD distributors. The company is likely to deleverage in 2019, assuming no further M&A or equity injections. Growth through M&A: Fitch expects Yestar to continue to grow through M&A, but it remains to be seen whether the company will continue to employ a consistent and prudent M&A strategy while maintaining a strong balance sheet. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Yestar include: - EBITDA margin to remain around 16%-17% between 2016 and 2018 - Acquisition of remaining 30% stake in IVD distributor Jiangsu Uno in 2H17 - Acquisition of remaining 30% stake in IVD distributor Anbaida in 2H18 RATING SENSITIVITIES Positive: Future developments that may lead to a positive rating action include: - Significant increase in operating scale, brand partners and geographic diversification while keeping FFO net leverage below 2.5x on a sustained basis Negative: Future developments may lead to a negative rating action include: - FFO net leverage above 2.5x on a sustained basis - EBITDA margin below 15% on a sustained basis - Sustained material decline in revenue growth of existing distributors Contact: Primary Analyst Roy Zhang Associate Director +852 2263 9979 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Charles Li +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 5 August 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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