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Rating Action:

Moody's affirms Yestar's Ba3 ratings; revises outlook to negative

 The document has been translated in other languages

21 Aug 2019

Hong Kong, August 21, 2019 -- Moody's Investors Service ("Moody's") has affirmed the Ba3 corporate family rating and senior unsecured rating of Yestar Healthcare Holdings Company Limited ("Yestar").

At the same time, Moody's has changed the outlook on the ratings to negative from stable.

RATINGS RATIONALE

"The negative outlook reflects our expectation that Yestar's liquidity will tighten on the back of rising working capital to fund business growth, and that it will likely use short-term debt to fund payments associated with previous acquisitions," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.

"This narrowed liquidity headroom amid a tightened funding environment could reduce the company's buffer against working capital needs and potential business volatility," adds Ho who is also Moody's Lead Analyst for Yestar.

Moody's expects Yestar's working capital needs will rise as its In Vitro Diagnostic (IVD) distribution and service provision business grows, given the longer payment terms associated with this business. The company's medical business, which includes its higher margin IVD business, grew 19% year-on-year to RMB2.1 billion in 1H 2019, accounting for 90% of total revenue. As a result of its growing IVD business, the company's accounts receivable days increased to 102 in 2018 from 73 in 2016.

The risk associated with longer receivable days is partially mitigated by its exercise of strong credit controls, the high exposure of its medical business to hospitals and clinics in economically developed first-tier cities and provinces, and the increasing geographic diversity of its customer base. The ratio of impaired accounts receivable has been low and averaged around 0.7% during 2016 to 2018. Moody's expects Yestar's annual operating cashflow to remain solid at about RMB220 million over the next 12 months.

Moody's expects Yestar's level of short-term debt to rise to fund the company's payments associated with its previous acquisitions. As of 30 June 2019, Yestar's current liabilities included amounts payable to non-controlling shareholders of subsidiaries acquired by Yestar, who have the option to sell their remaining interests to Yestar, which option is valued at RMB1.5 billion.

Yestar announced on 15 August that no definitive legally binding agreement or contract detailing the terms and conditions of the proposed acquisition for the remaining interests has been entered into, and that the proposed acquisition is subject to further negotiation.

Moody's expects Yestar will start paying down the amounts due to non-controlling shareholders of the company's acquired subsidiaries over the next 12 to 18 months, using internal resources and short-term bank borrowings.

Yestar's liquidity is adequate. Its restricted and unrestricted cash of RMB716 million as of 30 June 2019 and operating cashflow of about RMB220 million over the next 12 months will be sufficient to cover its short-term debt, estimated payments associated with its acquisitions and investment needs over the next 12 months.

However, Moody's expects liquidity headroom will narrow for Yestar on the back of greater working capital needs and rising short-term debt. Specifically, Moody's expects cash to short-term debt, including restricted cash, will decline to about 180% over the next 12 months from 565% at the end of 2016.

Nonetheless, the company has demonstrated a track record of access to diversified funding channels, including USD bonds and public equity financing, as evidenced by its issuance of new shares to FUJIFILM Holdings Corporation (A1 stable) in December 2018, and also evidence of repayment flexibility in its acquisition-related payments.

Moody's also expects that the company will be able to roll over its debt with domestic banks and refinance its USD bond due in September 2021, given its profitable operations and solid market position.

Nevertheless, any further weakening in its liquidity position will pressure its rating.

Yestar's Ba3 corporate family rating reflects the company's solid position in the distribution of medical consumable products in China and strong and sustainable partnership with leading global companies including Roche Holding AG (Aa3 stable) and FUJIFILM Holdings Corporation (A1 stable).

Although Yestar's partnership with Roche only began in 2014, the company has demonstrated its ability to cultivate strategic long-term supplier relationships, such as its relationship with FUJIFILM since 2001. FUJIFIM held a 9.6% shareholding in Yestar at the end of 2018.

Yestar's revenue grew 12% year on year to RMB2.2 billion in 1H 2019, driven by growth in its medical business, which was supported by an increase in market share in lower tier hospitals in its existing network and an expansion in geographical coverage.

At the end of June 2019, Yestar had a medical consumable distribution network covering four first-tier cities and eight provinces in China, up from four first-tier cities and seven provinces at the end of 2018.

Moody's expects Yestar's revenue to grow about 9% over the next 12-18 months, supported by growing demand for medical consumable products and continued expansion in hospital coverage.

Yestar's leverage, as measured by adjusted debt/EBITDA, was stable at about 2.0x in the 12 months ending June 2019 compared with 2.1x in 2018, as EBITDA rose in line with adjusted debt, which reached about RMB1.9 billion at the end of June 2019.

Moody's expects Yestar's leverage will remain around 2.2x in the next 12-18 months, as cash flow generation from earnings growth should offset a rise in debt to fund business growth and payments associated with acquisitions.

At the same time, Yestar's rating is constrained by its (1) modest size and high supplier concentration, (2) relatively short operating history in distributing IVD products, and (3) sizeable funding needs associated with acquisitions.

Yestar's ratings also consider the following governance aspect of the environmental, social and governance (ESG) factor.

Yestar's ownership is concentrated in a small number of shareholders, including its chairman and CEO who has also pledged a portion of his shares. This situation is partially mitigated by Yestar's status as a listed and regulated entity and track record of maintaining sound corporate governance.

Yestar's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because creditors at the holding company benefit from cash flow generation across a number of operating subsidiaries, mitigating structural subordination risk.

The ratings outlook could return to stable if Yestar improves its liquidity over the next 12-18 months, if it stabilizes its working capital cycle as it pursues business growth, and if it uses long-term -- rather than short-term -- funding to address its financing needs.

Financial metrics that Moody's would consider for a change in the outlook to stable include cash to short-term debt above 2.0x over the next 12-18 months.

Downward ratings pressure could emerge if Yestar's operating performance or liquidity deteriorates because of (1) a weakening in key supplier relationships, (2) a decline in the company's competitiveness, or a significant change in the competitive landscape of the film or IVD product market, (3) the pursuit of a more aggressive financial management policy, or (4) a failure to maintain sound corporate governance.

Credit metrics indicative of downward rating pressure include adjusted debt/EBITDA above 3.0x-3.5x or cash to short-term debt below 1x on a sustained basis

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Shanghai and listed on the Hong Kong Stock Exchange since October 2013, Yestar Healthcare Holdings Company Limited is one of the largest distributors of Roche Holding AG's (Aa3 stable) diagnostics products in China and is also a leading distributor of FUJIFILM Holdings Corporation's (A1 stable) film products in the country.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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.

Gerwin Ho
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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