Hong Kong, July 07, 2022 -- Moody's Investors Service has affirmed Want Want China Holdings Limited's A3 issuer rating.
The outlook remains stable.
"The rating affirmation reflects our expectation that Want Want's steady operations, high profitability and stable cash flow generation will continue to support its strong credit profile over the next 1-2 years," says Ying Wang, a Moody's Vice President and Senior Analyst.
"The company's low leverage, solid net cash and sustained free cash flow will remain as a buffer against the increased challenges arising from China's slowing economic growth and rising raw material costs," adds Wang.
RATINGS RATIONALE
Want Want's A3 issuer rating reflects the company's (1) dominant position in the Chinese snack food market, which has shown stable growth; (2) solid track record in achieving growth and maintaining a sound financial profile under prudent financial management; (3) proven ability to maintain profitability, with pricing and packaging changes; and (4) product diversity and the long shelf life of its products, which effectively address food safety issues in China.
However, the rating is constrained by the challenges that Want Want faces in (1) optimizing its operations and improving its efficiency, given its large and diversified product lines; (2) developing new products to meet changing customer preferences amid intense competition; and (3) managing its profit margins, which will likely be strained because of subdued consumer sentiment and the need to upgrade existing products, build diversified distribution channels and explore new emerging channels.
Moody's expects demand growth to slow for snack foods and beverages in China in 2022, considering the softening economic expansion and supply chain disruptions as a result of strict control measures relating to the pandemic in the first half of this year.
Moody's forecasts Want Want's revenue will grow by about 2% in the fiscal year ended March 2023 (fiscal year 2022), a lower rate than 9% a year earlier. The continuous revenue expansion reflects Want Want's strong brand recognition, extensive distribution network and proven research capability to introduce new products that cater to evolving customer preferences.
Moody's expects Want Want's adjusted EBITDA margin to remain at the low end due to the rising costs of purchasing raw materials including whole milk power, palm oil and tinplate. Margins will be about 28% in fiscal 2022, compared with a range of 29%-32% during fiscal years 2019-20. The margin decline will be moderate because of Want Want's pricing increase initiatives for most products, as well as its efforts to increase operating efficiency and upgrade the product portfolio.
Want Want's leverage, as measured by adjusted debt/EBITDA, declined to about 1.0x in fiscal 2021, from 1.4x a year earlier, as the reduction in its reported debt more than offset a moderate decrease in EBITDA.
Moody's projects the company's leverage will continue to fall to around 0.6x over the following 12-18 months, considering its strong cash flow and after the company repaid its US$500 million bond in April 2022.
Want Want's liquidity position remains robust, as indicated by its solid net cash position of RMB9.9 billion in March 2022.
Moody's expects Want Want to generate positive free cash flow over the next 12 months, supported by its high profitability, efficient working capital cycle and minimal capital expenditure requirements. The company's operating cash flow of around RMB4 billion is sufficient to cover its capital expenditure of around RMB400 million and the expected dividend payout.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook on Want Want's rating reflects Moody's expectation that the company will (1) maintain its leadership position in China's snack food market, along with its stable profit margins; and (2) continue to pursue its organic growth strategy while maintaining a prudent financial profile.
Want Want's rating could be upgraded if the company (1) records strong organic sales growth without sacrificing its profitability (favorable metrics include an EBIT margin above 20%-25%); (2) further diversifies its product offerings and revenue base; (3) maintains a solid liquidity position, reflected by a strong cash balance and committed undrawn bank facilities that exceed its short-term debt obligations and capital spending; and (4) strengthens its financial position further, with adjusted debt/EBITDA staying below 1.0x on a sustained basis.
On the other hand, Moody's could downgrade the rating if the company (1) shows declining profitability with its EBIT margin below 15%, and weakening cash flow because of a falling market share; (2) encounters material food safety problems, which would weaken consumer confidence in its products and its market share; (3) undertakes an aggressive dividend policy or acquisitions that weaken its balance-sheet liquidity, or there is evidence of cash leakage to its parent or related companies; and (4) registers weakening credit metrics, with adjusted debt/ EBITDA above 2.0x and a negative free cash flow (FCF) over a prolonged period.
The principal methodology used in this rating was Consumer Packaged Goods published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389866. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Want Want China Holdings Limited is one of the largest companies in China's food and beverage industry. The company specializes in the production and distribution of a broad range of snack foods, including rice crackers, flavored dairy drinks and other leisure food products, such as candies, cup jellies and ball cakes. It listed on the Hong Kong Stock Exchange in March 2008.
REGULATORY DISCLOSURES
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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
