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Fitch Assigns Reward International's USD Senior Notes Final 'B+'
February 6, 2017 / 8:17 AM / in 10 months

Fitch Assigns Reward International's USD Senior Notes Final 'B+'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, February 06 (Fitch) Fitch Ratings has assigned Reward International Investment Co. Ltd's (Reward International) 7.25% US dollar Senior Notes a final rating of 'B+' and Recovery Rating of 'RR4'. Reward International is a 100% owned subsidiary of Reward Science and Technology Industry Group Co., Ltd. (Reward Group, B+/Stable). The notes are rated at the same level as Reward Group's senior unsecured debt rating as they represent unconditional, unsecured and unsubordinated obligations of the company. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 11 January 2017. KEY RATING DRIVERS Solid Balance Sheet Profile: Reward Group's leverage is healthy, with FFO-adjusted net leverage of 1.3x at the end of 2015. Fitch expects FFO fixed-charge coverage to remain above 3x in the next few years after the acquisition of Panrosa US. Reward Group's debt maturity profile is also improving as the company has been refinancing its short-term debt with longer-term domestic bonds throughout 2016. As of 30 June 2016, Reward had readily available cash of CNY4.2bn, restricted cash of CNY272m and unutilised credit facilities of CNY232m, sufficient to cover short-term borrowings of CNY1.7bn. Diversifying Operations: Prior to 2015, Reward Group mainly operated as a manufacturer of household cleaning products (such as laundry detergent) and a dairy producer supplying whole milk power (WMP) to packaged food companies such as Wahaha and Kraft. Reward Group has diversified its product offerings in the past two years. It successfully expanded into formula milk and soy milk, which already accounted for CNY1.2bn or 20% of total revenue in 2015. In the consumer product segment, it aims to expand in personal care products through the acquisition of Panrosa US. Weak Market Position, Execution Risks: Reward Group's market position in each of its markets is relatively weak - it only had 1% share in China's laundry products market in 2015 and 7.6% share in China's industrial milk power market in 1H16. There is also limited product differentiation, and most of Reward Group's products face fierce competition from both local and overseas brands. Reward Group's new-business initiatives have limited synergy with existing businesses, and execution risk is high due to the company's short track record in these areas. Concentrated Shareholding, Low Transparency: Reward Group is a privately owned company, and the level of financial disclosure is weaker than listed companies. It is also not audited by one of the Big 4 accounting firms. Mr. Hu Keqin, the founder of Reward Group, holds 72.3% of the company's shares while his family holds another 23.6%. The concentrated shareholding means that there is limited board oversight, with the two independent board members only appointed in 2016. Food Safety Risks: Reward Group's dairy operations were briefly suspended in April 2016 after a review by China Food and Drug Administration. No problematic product sample was found, but the review flagged issues with the condition of the production facilities, quality control, record-keeping, and implementation of food safety regulations. Although operations resumed shortly after that, the incident highlights food safety as a potential risk. Any regulatory violations may inadvertently damage Reward Group's reputation and pressure the company's profits and cash flows. Bond Issuance to Fund Acquisition: Reward Group plans to use the bond proceeds to acquire Panrosa US for CNY1.3bn, after having acquired Panrosa Jiangsu, the China production facility, in 2015. Panrosa US produces daily products such as hand creams and shower gels, and has a complete distribution network in the US, including wholesalers and budget supermarkets like Dollar Tree and Dollar General. Following the acquisition, Reward Group plans to expand Panrosa's business in both China and international markets. DERIVATION SUMMARY Reward Group is rated one notch below PT Japfa Comfeed Indonesia TBk (BB-/Stable), which mainly reflects Reward Group's weaker business profile and market position. Reward Group is rated at the same level as Avon Products, Inc (B+/Negative). Reward Group has smaller scale than Avon, and a weaker business profile but higher margins and lower leverage. Reward Group is rated one notch above Labeyrie Fine Foods SAS (B/Stable) and Picard Bondco S.A. (B/Stable), given its stronger balance-sheet profile. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: - 3%-5% revenue growth in 2017-18, driven by new businesses and the Panrose US acquisition - 20% EBITDA margin in 2016-19 - No common dividends RATING SENSITIVITIES Negative: Further developments that may, individually or collectively, lead to negative rating action include: - Sustained decline in revenue - FFO-adjusted net leverage sustained above 2x - Sustained negative free cash flow - EBITDA margin sustained below 15% - Failure to provide regular accounting disclosures Positive: No positive rating is likely in the next 12-18 months due to the small scale of Reward Group's individual businesses, and limited regulatory oversight over the company. LIQUIDITY Sufficient Liquidity: As of 30 June 2016, Reward Group had cash and cash equivalents of CNY4.2bn, which is sufficient to cover its short-term debt of CNY1.7bn. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Secondary Analyst Chloe He Associate Director +6 21 5097 3015 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 18 November 2016 Summary of Financial Statement Adjustments - Business taxes and surcharges have been netted off from revenues - CNY420m of cash (end-2015) has been classified as not readily available cash - CNY272m of external guarantees (end-2015) has been added to debt Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here 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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