September 8, 2017 / 9:04 AM / 13 days ago

Fitch Affirms Huiyuan Juice at 'B+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 08 (Fitch) Fitch Ratings has affirmed China Huiyuan Juice Group Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+' and senior unsecured rating of 'B+' with a Recovery Rating of 'RR4'. Fitch has also affirmed the USD150 million 6.5% senior unsecured notes due 2020 a rating of 'B+' with a Recovery Rating of 'RR4'. The Outlook on the IDR is Stable. The headroom on Huiyuan's ratings has decreased following a significant rise in accounts receivable as of end-June 2017, contrary to Fitch's prior expectations. Fitch views this as a key credit issue, although this is partially mitigated by solid revenue growth and healthy margins in 1H17. KEY RATING DRIVERS Weakness in Trade Receivables: Huiyuan Juice's trade receivables balance increased further by around CNY400 million in 1H17 following a sharp rise in 2016. This is substantially different from Fitch's earlier expectation of a reduction in trade receivables - based on previous communication with management. The discrepancy arose mainly from the factoring in of CNY1 billion in trade receivables, which was taken off the books in the management accounts but treated as on-balance sheet under IFRS. Under Fitch's corporates rating criteria, debt factoring is generally treated as a form of secured debt, regardless of accounting treatment. However, Fitch continues to view the extended working capital as a credit weakness for Huiyuan. We have revised our working-capital assumptions, and now expect Huiyuan Juice to maintain its trade debtor days over 215 days in 2017 in an effort to support downstream distributors. The receivables days have not yet shown signs of stabilisation, so we have also tightened the leverage metrics at which a downgrade would be considered. Improved EBITDA Margin: Fitch expects Huiyuan Juice's margins to normalise somewhat in 2H17 but for the EBITDA margin to stay slightly wider than historical levels. We have revised our EBITDA margin forecast to 18% in the next two years, from 16%. Operating results improved in 1H17, with 4.3% growth in revenue and an EBITDA margin expanding to 28% (versus 17.8% in 2016). The improved EBITDA margin was driven by generally better production efficiency, a wider product margin and reduction in general operating expenses. Leading Chinese Juice Maker: Huiyuan Juice's ratings continue to be supported by its strong brand, leading market position and integrated operations. The company has produced and sold juice products in China for more than 20 years, with a dominant market share in the 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, better quality control and lower seasonal volatility. Limited Future Capex: Fitch does not expect major capex in the near future. The capacity utilisation rates of Huiyuan Juice's production facilities have been low for many years due to previous over-expansion. The company has been disposing of some of its idle and inefficient capacity, and spent only CNY117 million on fixed-asset and land-use rights purchases in 1H17. High Leverage, Moderate Coverage: Fitch believes that the company should be able to maintain its current coverage ratio at around 3x for the next three years. We also expect that net leverage - measured by FFO net adjusted leverage - is likely to remain at 4x, driven by single-digit revenue growth, an improved margin and large working-capital needs. Fitch has reclassified bank deposits with initial maturities of over three months as readily available cash. 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 Russia's 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 the UK's Premier Foods plc (B/Negative) and Turkey's Yasar Holding A.S. (B/Stable), Huiyuan Juice has a similar EBITDA size but a stronger FFO margin, coverage and leverage ratios. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth to remain around 4% in the next two years; - EBITDA margin to remain at around 18% in the next two years; - Capex to slow down to CNY200 million per annum, as the company has no new major capex plans; - No common dividend pay-out; and no share repurchase in 2017; The recovery rate is now 40% based on the end-June 2017 balance sheet, compared with 54% previously. The Recovery Rating remains at 'RR4'. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Substantial increase in business scale - FFO fixed-charge coverage sustained above 5x - FFO adjusted net leverage sustained below 2.5x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deterioration in working capital flow, i.e. longer account receivables days - EBITDA margin sustained below 15% - FFO adjusted net leverage sustained above 4.5x - Substantial decrease in revenue LIQUIDITY Adequate Liquidity: Huiyuan Juice had CNY4.2 billion in unrestricted cash, CNY600 million in available undrawn bank facilities and CNY1.2 billion "Neibaowaidai" bank facilities (domestic guarantee offshore borrowings) at end-June 2017. The company also successfully issued USD150 million in senior unsecured notes in July to refinance its existing borrowings. These were enough to repay and refinance its short-term debt obligation of CNY5.6 billion as of end-June 2017. 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 5097 3009 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Summary of Financial Statement Adjustments Bank deposits and restricted cash pledged to bank loans are treated as readily available cash. Outstanding bonds are adjusted to face value 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 Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) 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. 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