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Rating Action:

Moody's assigns Ba3 to Health and Happiness' proposed senior notes; outlook positive

 The document has been translated in other languages

11 Oct 2019

Hong Kong, October 11, 2019 -- Moody's Investors Service has assigned a Ba3 senior unsecured rating to the proposed senior notes to be issued by Health and Happiness (H&H) International Holdings Limited (Ba2 positive).

The rating outlook is positive.

The bond proceeds will be used by the company to redeem its USD bonds due in 2021.

The bond rating reflects Moody's expectation that H&H will complete the bond issuance upon satisfactory terms and conditions, including proper registration with the National Development and Reform Commission in China (A1 stable).

RATINGS RATIONALE

"The proposed notes issuance will not impact H&H's Ba2 corporate family rating or positive rating outlook, because the proceeds will be used by the company to refinance its existing debt," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.

"The issuance will further improve H&H's debt maturity profile," adds Ho, who is also Moody's Lead Analyst for H&H.

Moody's expects that H&H's revenue will grow about 20% over the next 12-18 months from the RMB10 billion achieved in 2018, driven by growing sales in its baby nutrition and care products as well as adult nutrition and care products segments.

On the other hand, Moody's expects that H&H's EBITDA margins will contract to 21%-22% over the next 12-18 months compared with 23.2% in the 12 months ended 30 June 2019, driven by higher marketing, product and channel development, and brand-building expenses to support the company's expansion into new products and geographies.

Nevertheless, the company will continue to generate positive free cash flow over the next 12-18 months, enabling H&H to reduce its debt.

Consequently, the company's adjusted debt/EBITDA will likely improve to 2.3x-2.4x over the next 12-18 months from 2.5x in the 12 months ended 30 June 2019. This level of debt leverage is strong for H&H's Ba2 corporate family rating.

H&H's liquidity profile is solid. At 30 June 2019, its cash balance — including restricted cash — totaled RMB2 billion, which could cover its short-term debt, including lease liabilities, of RMB208 million.

H&H's senior unsecured bond rating for the proposed senior notes is one notch lower than it would otherwise be, because the bond is subordinated to the senior secured loan facilities.

H&H's Ba2 corporate family rating reflects (1) the company's leading position among domestic infant milk formula (IMF) providers in China and diversification into a leading position in Australia's (Aaa stable) vitamin, herbal and mineral supplements (VHMS) market, (2) the favorable demand trend for IMF in China and for VHMS in Australia and China, and (3) the company's strong profitability and steady cash flow generation, which in turn reflect its brand equity and the confidence-sensitive nature of its products.

However, the rating is constrained by (1) the company's developing scale in competitive markets, and (2) regulatory and product safety risks.

H&H's rating also takes into account the following environmental, social and governance considerations.

H&H benefits from the growing demand for IMF and VHMS in China, driven by changing lifestyles stemming from urbanization, rising disposal income and greater awareness of health and wellness issues.

On the other hand, H&H faces regulatory and product safety risks because it derives its revenues mainly from IMF and VHMS, which are designed for human consumption. These risks are mitigated by the company's premium product positioning and focus on quality.

H&H's ownership is concentrated and only a minority of its board consists of independent directors. This risk is partially mitigated by the fact that the company is a listed and regulated entity.

The positive ratings outlook reflects Moody's expectation that H&H will expand its revenue scale and deleverage over the next 12-18 months.

Upward ratings pressure could arise if (1) the company maintains a strong market position in the IMF and VHMS segments; (2) its revenue scale expands; (3) H&H maintains a conservative financial policy and strong liquidity, such as sustained positive free cash flow, conservative dividend payouts, and cash/short-term debt exceeding 1.5x-2.0x; and (4) the company achieves debt leverage such that debt/EBITDA trends towards 2.0x-2.5x, while maintaining a steady EBIT margin and growing its revenue scale.

On the other hand, the ratings outlook could return to stable if H&H is unlikely to meet the upgrade conditions over the next 12-18 months.

The principal methodology used in this rating was Global Packaged Goods published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Health and Happiness (H&H) International Holdings Limited is a leading domestic infant milk formula provider in China and a leading vitamin, herbal and mineral supplements (VHMS) provider in Australia. The company holds a 100% stake in the Australian VHMS provider, Swisse Wellness Group Pty Ltd.

Established in 1999, H&H is headquartered in Hong Kong and listed on the Hong Kong Stock Exchange in December 2010. Its chairman, Mr. LUO Fei, as well as other principal shareholders, held a 67.3% stake in the company at 30 June 2019.

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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