Hong Kong, September 11, 2020 -- Moody's Investors Service has affirmed China Dili Group's
B3 corporate family rating (CFR).
The outlook remains stable.
"The affirmation of the rating reflects China Dili's moderate
debt leverage and the significant increase in its stake in the agriculture
wholesale markets that is operates," says Shawn Xiong,
a Moody's Assistant Vice President and Analyst.
"We expect its increased ownership of land and properties will improve
the company's access to bank financing," adds Xiong.
RATINGS RATIONALE
China Dili's B3 CFR reflects the company's moderate debt leverage
and high level of ownership of the agriculture wholesale markets it operates.
The increased ownership of land and properties will enhance the company's
control over its operations and improve its access to bank financing.
On the other hand, the rating is constrained by the company's
small operating scale and the inherent business risk posed by its limited
experience in operating an agriculture wholesale markets business.
Due to coronavirus-related disruptions, China Dili's
revenue and adjusted EBITDA for the first half of 2020 declined by around
7% and 11% to around RMB689 million and RMB499 million,
respectively, from the corresponding period a year ago. Nevertheless,
its adjusted EBITDA margin remained solid at around 69%.
As a result, the company's financial leverage, as measured
by adjusted debt/EBITDA, registered around 2.6x for the 12
months ended June 2020.
Moody's expects China Dili's revenue to decline by 5%-6%
in 2020 before returning to 10%-12% growth in 2021.
As a result, its leverage will increase to around 2.9x over
the next 12-18 months from 2.6x at 30 June 2020.
Moody's views China Dili's recently completed acquisition
of the land and properties it uses to operate its six existing agriculture
wholesale markets from New Amuse Limited -- an entity which is controlled
by China Dili's controlling shareholder -- as a credit positive
development.
The acquisition will enhance China Dili's control over its core
operations. China Dili now owns nine out of the ten agriculture
wholesale markets it operates, which greatly reduces uncertainty
over the viability of the company's operations. China Dili
used to lease the six agriculture wholesale markets from New Amuse.
The acquisition was funded by equity and did not materially raise the
company's leverage. China Dili paid a total consideration
of RMB4.0 billion for the acquisition, which was settled
by the issuance of the convertible bond to New Amuse. On the same
day, New Amuse fully exercised its conversion rights in respect
of the convertible bond in the principal amount of RMB4.0 billion.
In terms of additional debt, the acquired entities had short-term
bank loans of RMB2.4 billion and other unsecured borrowings in
an aggregate amount of RMB100 million as at 31 December 2019. At
the same time, the acquired entities had a cash balance of RMB1.4
billion as at 31 December 2019. Moody's expects China Dili
to pay off part of the acquired entities' bank loans using the RMB1.4
billion in cash, leading to additional debt of around RMB1.1
billion for China Dili.
Moody's expects the impact to China Dili's adjusted debt to
be relatively small as the reduction in capitalized leases should offset
the majority of the additional RMB1.1 billion debt.
Moody's expects China Dili will continue to increase its scale by
improving operations at its existing markets, but also by developing
new markets such as the Kunming International Agricultural Product Logistic
Park.
In terms of environmental, social and governance (ESG) factors,
China Dili's rating also considers the following.
From a social perspective, Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial
implications for public health and safety. Moody's ratings
also consider the impact on China Dili of the breadth and severity of
the shock, although the impact has so far been relatively small
for the company.
In terms of governance, China Dili's rating has considered
the company's high corporate governance risk due to its substantial
connected party transactions historically. Additionally,
China Dili's ownership is concentrated in Mr. Dai Yongge
and his family, who collectively hold a 67.06% stake
in the company. This risk is partially mitigated by the company's
status as a listed and regulated entity as well as the fact that the company's
eight-member board consists of four independent non-executive
directors.
China Dili's liquidity is weak. The company's cash
balance of RMB817 million as of 30 June 2020, combined with estimated
operating cash flow of RMB700-800 million over the next 12 months,
is insufficient to cover its short-term debt of around RMB1.4
billion and estimated capital spending of around RMB200-300 million
over the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook on the rating reflects Moody's expectation that
China Dili will successfully extend its short-term bank loans and
its agriculture wholesale markets business will maintaining a stable performance
over the next 12-18 months.
Moody's could upgrade China Dili's rating if the company (1)
improves its scale; (2) demonstrates a sound track record of managing
its agriculture wholesale markets business; (3) achieves a sustainable
improvement in its financial profile; and (4) improves its liquidity
profile, with broader banking relationships.
Conversely, negative pressure could emerge on China Dili's
rating if its financial position deteriorates because of (1) a weaker-than-expected
performance in the agriculture wholesale markets business; (2) a
deterioration in its financial position owing to an aggressive debt-funded
expansion strategy; (3) a sustained weak liquidity profile.
The principal methodology used in this rating was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
China Dili Group, following the disposal of its commercial property
business in July 2016, is focusing on its agriculture wholesale
markets business. The company operated 10 wholesale agricultural
product markets across seven cities in China as of the end of June 2020.
Post its recent acquisition, China Dili now owns nine out of its
ten agriculture wholesale markets.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
Shawn Xiong
Asst Vice President - Analyst
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
