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Announcement:

Moody's: Shandong Ruyi's weak 2018 results have no immediate rating impact

06 May 2019

Hong Kong, May 06, 2019 -- Moody's Investors Service says that Shandong Ruyi Technology Group Co., Ltd.'s weaker-than-expected 2018 results are credit negative but have no immediate impact on its B2 corporate family rating (CFR) or on the B3 rating on the senior unsecured notes issued by Prime Bloom Holdings Limited and guaranteed by Shandong Ruyi.

The outlook is stable.

"Shandong Ruyi's debt leverage, as measured by adjusted debt/EBITDA, increased to 8.5x in 2018 from 6.5x a year prior, mainly because of weaker-than-expected earnings and an increased level of debt to fund investments and business expansion," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

"Nevertheless, we expect Shandong Ruyi's leverage to recover to 6.5x-7.0x in the next 12-18 months, driven by revenue growth and improved profitability through new textile production capacity, the ramp-up of new retail stores and benefits from its integrated operations. Such level of leverage remains appropriate for its B2 CFR," adds Lu.

The company's revenue decreased 4.1% to RMB34.3 billion in 2018 from a year prior, mainly because of lower revenues in the textile business due to the spinoff of three textile manufacturing subsidiaries and weaker performance in its apparel business, particularly due to warm weather in Japan in 4Q 2018.

However, Moody's projects the company's revenue to grow 13% in 2019 and 11% in 2020, mainly driven by (1) growth in the textile business as a result of increased production capacity with more advanced technology; and (2) sales growth from the apparel business, particularly through the store expansion of its subsidiary SMCP Group (B1 stable).

Shandong Ruyi' adjusted EBITDA margin declined to 12.0% in 2018 from 14.3% in 2017, as a result of (1) weaker gross margins in its textile and apparel businesses; and (2) higher expenses arising from the rapid new store expansion of SMCP.

Moody's expects the company's adjusted EBITDA margin will recover to around 14.0%-14.5% over the next 12-18 months, mainly driven by higher contributions from and improved margins in its apparel business, particularly through SMCP, and lower operating expenses to fund SMCP's expansion as it slows its store expansion.

Shandong Ruyi's adjusted debt rose by 5.0% to RMB35.1 billion in 2018, primarily to support the acquisition of three commercial buildings in Jining, Shandong mainly for third-party leasing, as well as higher capital expenditure to fund SMCP's store expansion in Asia and Europe and the Middle East, excluding France, and the capacity expansion of its textile business.

Moody's projects the company's adjusted debt to increase modestly in the next 12-18 months to support its investments and working capital needs.

Shandong Ruyi's liquidity position is weak. As of the end of 2018, Shandong Ruyi's cash, including pledged deposits of RMB9.0 billion and Moody's expected cash flow from operations of RMB2.1 billion for the next 12 months, was insufficient to cover its maturing debt of RMB9.5 billion, bills payable of RMB4.9 billion, and estimated maintenance capital spending of RMB100 million over the same period.

However, this weak liquidity position is mitigated by Shandong Ruyi's strong domestic banking relationships and good access to the equity capital markets and to onshore and offshore bond financing. In March 2019, Shandong Ruyi issued domestic medium-term notes of RMB1 billion.

Shandong Ruyi's B2 corporate family rating reflects the company's established track record of operating an integrated textile manufacturing business with a global sales network. The rating also highlights Shandong Ruyi's ability to enhance its profitability through downstream expansion into the manufacturing and retail sale of apparel.

At the same time, Shandong Ruyi's rating is constrained by its strong appetite for acquisitions, the high financial risk resulting from its debt-funded growth, and its weak liquidity position. The rating is also constrained by its weak transparency and the strong acquisitive appetite of its parent company, although partially mitigated by Shandong Ruyi's track record of prudent dividend policy and limited related-party transactions.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2001, Shandong Ruyi Technology Group Co., Ltd. is a vertically integrated textile company that engages in textile manufacturing and trading, apparel manufacturing and retailing, and cotton and wool production.

The company has three listed subsidiaries, including the Shenzhen Stock Exchange-listed Shandong Jining Ruyi Woolen Textile Co. Ltd., the Tokyo Stock Exchange-listed Renown Incorporated and the Euronext Paris-listed SMCP Group (SMCP, B1 stable).

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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