Hong Kong, August 04, 2017 -- Moody's Investors Service has assigned a first-time B1 corporate
family rating (CFR) to China Huiyuan Juice Group Limited.
At the same time, Moody's has assigned a B1 senior unsecured
rating to its proposed USD notes.
The ratings outlook is stable.
The net proceeds from the notes issuance will be used to refinance certain
existing indebtedness and for other general corporate purposes.
RATINGS RATIONALE
"Huiyuan's B1 CFR reflects the company's leading position and strong
brand name in China's growing fruit juice market, its vertically
integrated business model — which safeguards product quality —
and improved profitability," says Lina Choi, a Moody's Vice
President and Senior Credit Officer.
Huiyuan has more than 20 years of operational experience in the juice
industry in China. It has established significant brand recognition
in the country, based on the fact that it was one of the pioneers
in launching 100% juice products during the 1990s.
According to Nielsen's report, Huiyuan achieved the largest
share (44.2%) of China's 100% fruit and vegetable
juice market by sales value in 2016, leading the second-largest
player's 36.4% share by a wide margin.
In terms of its nectar product, Huiyuan had a 28.3%
market share by sales value in 2016 versus the second and third largest
players' 19.9% and 9.9%.
The CFR also reflects the favorable demand trend existent in China,
supported by urbanization, rising disposable income levels,
and a greater focus by consumers on natural foods, such as 100%
fruit juices.
This steady demand will support Huiyuan's revenue, which Moody's
expects will grow over the next two years and exceed RMB6 billion by the
end of the fiscal year ending 31 December 2018.
The B1 CFR also considers Huiyuan's improved profitability, supported
by its vertical business model and rationalized distribution channel.
This strength provides it with a buffer against competition-driven
pricing pressures.
Moody's expects that Huiyuan's gross margin — which rose to
40.7% in 2016 from 34.7% in 2014 — will
stay solid over the next two years, driven primarily by its steady
access to raw materials.
China Huiyuan Industry Holdings, a key upstream subsidiary,
is the main supplier of raw materials for Huiyuan. The subsidiary's
output accounted for 60% of the total raw materials purchased by
Huiyuan in 2016, on a value basis.
Huiyuan's vertically integrated operation enables it to control
the entire value chain from fruit processing, bottling, and
all the way to sales and marketing.
The company has proactively developed direct sales relationships with
large corporate customers, as well as hypermarkets and convenience
chain stores, particularly for the coverage of Tier-1 cities.
Direct sales relationships reduce the number of self-run sales
offices and associated staff, lower overall selling costs,
and improve Huiyuan's EBITDA margin.
Moody's expects that Huiyuan's adjusted EBITDA margin —
which rose to 19.6% in 2016 from 9% in 2014 —
will stay steady at around 18%-19% over the next
two years.
"However, Huiyuan's ratings are constrained by its product concentration,
weak cash flow generation and resultant modest financial profile,"
adds Choi, who is also Moody's Lead Analyst for Huiyuan.
Huiyuan's product concentration in fruit juices will expose it to
the risks of pricing competition and alternative products, especially
during times of slow consumption.
While Huiyuan's focus on 100% juice products has earned it
a position among the top tier players in China's non-alcoholic
beverage market, its product portfolio only covers a portion of
the same market. Such concentration will reduce the company's
pricing flexibility, and results in high cash flow volatility when
sales slow significantly or pricing competition is keen.
Moody's expects that Huiyuan will generate positive free cash flow
in 2017 and 2018, driven primarily by improving working capital
management and reduced capital spending levels.
Huiyuan has experienced working capital outflow in the last two years,
due to the extended payment terms it has provided to dealers, against
the backdrop of slow sales. In addition, it has incurred
heavy capital expenditure in the last few years, as it worked to
complete its vertically integrated business model.
Moody's expects that both factors — which have weakened the
company's free cash flow — to improve over the next two years.
Huiyuan has proactively reduced its receivables since 2016, and
it will not need to invest significant capital expenditure to further
increase its production and processing centers. Maintenance capital
expenditure will be in the order of RMB150-RMB200 million per year,
and can be fully funded by cash flow generated from operations.
Moody's expects that Huiyuan will deleverage and improve its financial
profile over the next two years. Moody's further expects
that the company's adjusted debt/EBITDA will fall to around 6.0x
by end-2017, and further to 4.5x by end-2018.
Huiyuan's liquidity is modest. Moody's estimates that
at end-June 2017, Huiyuan had RMB3.5-RMB4.5
billion in payment obligations over the next 12-18 months.
Moody's says that Huiyuan should be able to meet these obligations,
with a combination of its solid cash position and refinancing activities.
Huiyuan's bond rating is not notched down from its CFR of B1 because
the majority of claims — which are mainly composed of debt —
reside at the holding company level.
The stable ratings outlook reflects Moody's expectation that Huiyuan will
maintain its leading market position in China's juice market,
healthy revenue growth, and stable profit margin. Moody's
expects that the company can refinance its payment obligations through
improving working capital management and reducing capital expenditure.
Upward ratings pressure could arise if Huiyuan: (1) establishes
a track record of stable free cash flow generation; (2) expands its
product variety outside juices; (3) continues to deleverage and improve
its debt maturity profile; and (4) shows improved credit metrics,
such that its debt/EBITDA falls below 4.0x on a sustained basis.
Downward ratings pressure could arise if Huiyuan exhibits: (1) weakening
sales and/or a weakening market position; and (2) a deteriorating
profit margin and weakened liquidity, due to increased competition,
poor working capital management, or aggressive financial policies.
Metrics indicative of downward ratings pressure include its debt/EBITDA
failing to trend toward 5.0x-5.5x on a sustained
basis.
The principal methodology used in these ratings was Global Soft Beverage
Industry published in January 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Established in 1992 and headquartered in Beijing, China Huiyuan
Juice Group Limited (Huiyuan) is one of the major players in China's
juice market. The company has manufactured and distributed fruit
juices, vegetable juices and other beverages for more than 20 years.
It operates four major business segments — Juice Products,
Nectars, Juice Drinks and Other Beverage Products — through
subsidiaries.
The company is 65% owned by its chairman, Mr. Zhu
Xinli. In May 2013, Huiyuan completed the acquisition of
the entire share capital of China Huiyuan Industry Holdings, an
upstream juice puree and concentrates producer previously owned by its
chairman.
At end-2016, Huiyuan owned 40 production bases, including
28 bottling bases and 12 fruit processing and packaging plants across
China.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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.
Lina Choi
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
Gary Lau
MD - Corporate Finance
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
