Hong Kong, October 09, 2018 -- Moody's Investors Service has assigned a first-time B1 corporate
family rating (CFR) to China Wanda Group Co., Ltd.
The rating outlook is stable.
RATINGS RATIONALE
"China Wanda's B1 CFR reflects the company's improved profitability,
underpinned by the annual crude oil import quotas it receives from the
Chinese government," says Chenyi Lu, a Moody's Vice President
and Senior Credit Officer.
The refining segment is the company's largest business segment,
accounting for 56% and 58% of total revenue and gross profits,
respectively, in 2017. Moody's projects the segment
will increase its contributions to around 60% of revenue and 61%-62%
of gross profits over the next two years.
China Wanda's annual import quota for 4.4 million tons of
crude oil has helped lower its refining costs and improve the segment's
gross margin. The company first received this annual import quota
in December 2015 and has received the quota every year since. It
processed around 4 million tons of crude oil as feedstock in 2017.
As a result, the segment's gross margin increased significantly
to 18.6% in 2017 and 17.5% in 2016 from 6.3%
in 2015.
Moody's expects the company's revenue to grow by 17%
in 2018 and be flat in 2019. The strong growth in 2018 will be
driven by 25% growth in the refining segment, in turn underpinned
by improved oil prices and higher sales volumes.
Moody's also expects the company's adjusted EBITDA margin
to soften slightly to around 16% over the next 12-18 months
from a high of 16.4% in 2017. This level remains
above the 12.0%-13.5% recorded in 2014-2015
before the company received the import quota.
"China Wanda's CFR also factors in its growing track record of expanding
its operations and building a strong customer base, as well as its
diversified business portfolio which supports margin stability,"
says Lu, who is also Moody's Lead Analyst for China Wanda.
China Wanda started with the cable business in 1988 and gradually expanded
into the electronics business in 1990, the chemical business in
1995, and the tire business in 2004.
The company further grew its business scale and increased its revenue
year-on-year by 71% to RMB32.7 billion in
2014, driven by the ramp-up of the refining business,
which commenced operations in 2013.
China Wanda's diversified business portfolio features different
business cycles and demand characteristics, thus supporting its
margin stability.
On the other hand, China Wanda's CFR is constrained by its small
refining scale with concentration risk in a single site, its exposure
to China's evolving policies and regulations, and execution
risks associated with its large debt-funded expansion.
The company has a small refining scale with an annual crude distillation
capacity of around 5 million tons and narrow commodity type product slate
when compared with global refining peers. The refining business
is also exposed to a high level of geographic concentration and operating
risks, given its dependence on a single refining complex located
in Dongying, Shandong.
The company is exposed to fluctuating structural demand and regulatory
risks, stemming from China's evolving government policies
and regulations. These risks could raise its operating costs and
capital spending to comply with changes in environmental and safety standards,
and increase uncertainty around its future profitability and refining
margins.
Moody's expects the company to construct a large-scale petrochemical
capacity between 2019 and 2022. This major expansion plan will
raise the risk of cost overruns, schedule delays and other complications.
China Wanda's B1 CFR is also constrained by its limited financial disclosure
due to its privately owned company status and evidence of major inter-company
lending to its parent. In 2015, China Wanda provided a loan
to Wanda Holdings Group Co., Ltd. to support the parent's
capital spending. The outstanding loan balance was RMB3.9
billion at the end of 2017, accounting for 23% of China Wanda's
reported debt. Wanda Holdings is also a privately owned company
and does not publicly disclose its financials, leading to low transparency.
China Wanda accounted for around 85% of Wanda Holdings' adjusted
EBITDA and 83% of total assets on a consolidated basis in 2017.
Moody's expects the company's adjusted debt/EBITDA will trend
to 2.5x-3.0x over the next 12-18 months from
3.3x in 2017, driven by higher earnings and lower debt levels
supported by positive free cash flow generation for debt repayment in
2018. This level of leverage is strong for its B1 rating,
and provides some buffer against industry cyclicality, regulatory
risks and related-company transactions.
The company's liquidity position is adequate. At the end of June
2018, its cash, including restricted cash, of RMB6.6
billion and expected operating cash flow of around RMB4 billion were sufficient
to cover its short-term debt of RMB6.4 billion and estimated
capital expenditure of RMB2.2 billion over the next 12 months.
The company's liquidity position is strengthened by its good access to
domestic bank facilities and capital market funding. The company
has raised onshore bonds, including private placements, of
around RMB10.6 billion since 2015.
The stable outlook reflects Moody's expectation that China Wanda will:
(1) generate steady revenue and earnings growth; (2) maintain proper
corporate governance standards; and (3) preserve its adequate liquidity
over the next 1-2 years.
A rating upgrade is unlikely in the near term, given the company's
small scale in the refining segment and exposure to China's evolving
government policies and regulations. However, over the medium
term, the rating could be upgraded if China Wanda (1) meaningfully
improves its production scale and vertical integration through upgrades
and capacity expansion of its refinery business; (2) establishes
a track record of prudent financial policy and management; and (3)
strengthens its credit metrics, such that adjusted debt/EBITDA falls
below 2.0x and cash/short-term debt above 1.3x,
on a sustained basis.
On the other hand, the rating could be downgraded if (1) China Wanda
shows weaker revenue growth and deteriorating profitability as a result
of an industry downturn, intense competition or regulatory changes;
(2) it fails to adhere to prudent financial management and sound corporate
governance standards; (3) it pursues aggressive debt-funded
investments or/and increased funding requirements associated with its
capacity expansion program; (4) it shows weakened credit metrics
such that adjusted debt/EBITDA above 4.0x-4.5x on
a sustained basis; or (5) its liquidity profile significantly deteriorates.
The principal methodology used in this rating was Refining and Marking
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 2017, 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 the company,
is a privately-owned company engaged in other 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,
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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.
Chenyi Lu
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
Clement 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
