Hong Kong, July 24, 2019 -- Moody's Investors Service ("Moody's") has affirmed the B1 corporate
family rating (CFR) of China Wanda Group Co., Ltd ("China
Wanda").
Moody's has also revised the rating outlook to negative from stable.
RATINGS RATIONALE
"The affirmation of China Wanda's B1 CFR reflects our expectations
that the company's operational performance will remain steady,
and that it can continue to access funding, as evidenced by its
domestic bond issuance in early July 2019," says Ying Wang,
a Moody's Vice President and Senior Analyst.
"However, the negative rating outlook reflects the company's
weakening liquidity," adds Wang.
Moody's says China Wanda's weakening liquidity is manageable,
because its healthy cash flow generation and demonstrated ability to access
funding will support the refinancing efforts.
Moody's expects that the company's operating and financial
profile will remain steady. China Wanda's debt leverage will
trend towards 3.0x-3.5x over the next 12-18
months from 3.0x in 2018, because debt will increase to fund
its capital spending program. The company's adjusted debt/EBITDA
dropped to 3.0x in 2018 from 3.3x in 2017, mainly
driven by a reduction in debt that offset softening profitability.
China Wanda generated strong free cash flow of RMB1.9 billion in
2018, amid steady profitability and lower capital spending during
the year. Moody's expects that the company's free cash
flow will stay at a similar level in 2019, but decline in 2020,
driven by large — but discretionary — capital spending for
its capacity expansion program.
The company issued a RMB1.07 billion three-year domestic
bond at a cost of 6.8% on 5 July 2019. Proceeds of
the bond will be used for refinancing and working capital purposes.
The issuance demonstrated the company's access to the domestic bond
market for its funding needs.
China Wanda has provided an external guarantee to a third-party
company, Shandong Snton Group Co., Ltd, which
is under financial difficulties. The amount of the guarantee fell
to RMB903 million at 31 March 2019 from RMB1.28 billion at 31 March
2018.
Moody's will continue to closely monitor development of external
guarantees to Snton, including the progress of a lawsuit against
China Wanda's parent company.
China Wanda's liquidity is weakening, mainly because of a
large amount of domestic bonds puttable in 2019 and 2020. At the
end of March 2019, its unrestricted cash amounted to RMB4.6
billion. This amount, together with its bond issuance of
RMB1.07 billion and cash flow from operations of RMB4.3
billion over the next 18 months are insufficient to cover its debt maturing
over the next 18 months totaling RMB10.6 billion, including
RMB2.4 billion domestic bonds puttable in 2019 and RMB4.6
billion domestic bonds puttable in 2020.
Nevertheless, Moody's believes the company can successfully
refinance the short-term debt, given its track record of
access to diversified funding channels, including onshore debt instruments.
Environmental, social and governance issues are material to the
rating outcome and were assessed as follows.
Firstly, China Wanda's core operations in oil refining and
its planned expansion into petrochemical derivatives exposes to carbon
transition risk. The company will also need to keep investing in
technology and equipment to comply with the Chinese government's
stricter environmental requirements. Nonetheless, Moody's
points out that to date, China Wanda has not experienced any major
compliance violations related to air emissions, water discharge
or waste disposal.
Secondly, China Wanda is a privately-owned company with concentrated
ownership and limited independent supervision on the board. The
parent company, which owns a 50.24% stake in China
Wanda, is a privately-owned company with low transparency.
There is also evidence of intercompany lending by China Wanda to its parent
company.
China Wanda's exposure to external guarantees — which Moody's
factored in as adjusted debt — also indicate a less prudent financial
policy.
China Wanda's B1 CFR reflects the company's (1) improved profitability,
underpinned by the annual crude oil import quotas it receives from the
Government of China (A1 stable); (2) growing track record of expanding
its operations and building a strong customer base; and (3) diversified
business portfolio that supports margin stability.
However, China Wanda's B1 CFR is constrained by its small refining
scale with concentration risk in a single site, exposure to China's
evolving policies and regulations, and execution risks associated
with large debt-funded expansion. The CFR is also constrained
by the company's limited financial disclosure as a privately owned company
and evidence of intercompany lending to its parent.
China Wanda's rating outlook could return to stable if it (1) maintains
solid operating performance and profitability; (2) establishes a
track record of prudent financial policy and management; and (3)
improves liquidity to an adequate on a sustained basis.
Moody's could downgrade the rating if China Wanda (1) shows weaker
revenue growth and deteriorating profitability, because of an industry
downturn, intense competition or regulatory changes; (2) fails
to adhere to prudent financial management and sound corporate governance
standards; (3) pursues aggressive debt-funded investments
or/and increased funding requirements associated with its capacity expansion
program; (4) shows weakened credit metrics, such that adjusted
debt/EBITDA registers above 4.0x-4.5x on a sustained
basis; or (5) shows that its liquidity has deteriorated.
The principal methodology used in this rating was Refining and Marketing
Industry published in November 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Founded in 1988 and headquartered in Dongying, Shandong, China
Wanda Group Co., Ltd is a privately-owned company
operating multiple business segments including (1) refining (mainly refineries
of diesel and gasoline); (2) tire production; (3) the manufacture
of electric cables; (4) the manufacture of chemical products,
including methacrylate butadiene styrene and polyacrylamide; and
(5) electronics, including the production of polyimide film.
At the end of 2018, Mr. Shang Jiyong, the company's
chairman, indirectly owned 26% of the company via Wanda Holdings
Group Co., Ltd.
Wanda Holdings, which owns 50.24% of China Wanda,
is a privately-owned company engaged in businesses such as ports
operations, trading, real estate development and construction.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Ying Wang
Vice President - Senior 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
