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Rating Action:

Moody's assigns first-time B1 CFR to Nan Hai, B2 to USD notes; outlook stable

22 Sep 2017

Hong Kong, September 22, 2017 -- Moody's Investors Service has assigned a first-time B1 corporate family rating (CFR) to Nan Hai Corporation Limited.

At the same time, Moody's has assigned a B2 senior unsecured rating to the proposed USD notes to be issued by Top Yield Ventures Limited — a wholly owned subsidiary of Nan Hai — and unconditionally and irrevocably guaranteed by Nan Hai.

The ratings outlook is stable.

The net proceeds from the notes issuance will be used for general corporate purposes.

RATINGS RATIONALE

"Nan Hai's B1 corporate family rating reflects the company's profitable property development operations and the strong market position of its cinema operations; the latter of which is an industry with good growth potential" says Franco Leung, a Moody's Vice President and Senior Credit Officer.

Nan Hai's diversified business portfolio covers cinema network operations, property development, enterprise cloud and new media services. These businesses have different business cycles, thus reducing Nan Hai's risk exposure to any one industry.

Moody's expects Nan Hai's property development business -- which accounted for 51% of revenue and 70%-75% of EBITDA in 2016 -- will remain the largest revenue and profit contributor for at least the next 3 years, although the company plans to grow its cinema operations.

The property development segment is highly profitable, with high gross profit margins of 60% in 2016 that were not matched by other B or Ba-rated Chinese property peers.

The segment's high profitability is a result of its low-cost land bank in China's top-tier cities, namely Shenzhen and Guangzhou, where property demand is strong and property prices are high.

In addition, the company is unlikely to meaningfully replenish its land bank, given its longer term goal of primarily developing its cinema network. Its total land bank of around 1.5 million square meters in gross floor area at the end of July 2017 is sufficient to support its property development plans for the next 4-5 years.

Absent major land acquisitions, Nan Hai's property business will continue to generate positive free cash flow, which in turn is an important source of cash to fund the development of its other key business -- its cinema operations - over the next 2-3 years.

In view of its current business model, Moody's has applied as the principal rating methodology, the Homebuilding And Property Development Industry methodology - published in April 2015 - to assign the B1 corporate family rating.

If and when the company's cinema segment becomes the main revenue, profit and cash flow contributor -- which Moody's estimates will take at least 3-4 years -- Moody's may change its approach to rating Nan Hai to reflect the change in the associated operational and financial risks.

The B1 CFR also considers Nan Hai's investments to expand its cinema operations.

Based on Moody's estimates and adjustments, Nan Hai's cinema operations contributed around 35% of revenue and 24% of EBITDA in 2016. Moody's does not expect a material change in these results over the next three years, unless the company pursues further acquisitions.

Although the segment still contributes less than 50% of revenue and EBITDA, growth potential is supported by (1) its good market position, (2) ability to develop non-ticket cinema-related revenues, and (3) growth in box office revenue over the long term in China (A1 stable).

Nan Hai has operated cinemas in China since 2006. Its flagship cinema chain, Dadi cinema, was the country's second largest cinema operator in 2016, with a 4.9% share of box office sales.

Nan Hai has strengthened its market position and improved its geographic diversification through its acquisition of Orange Sky Golden Harvest Cinemas (China) Company Limited (OSGH)'s mainland China businesses in July 2017. The acquisition has grown the scale of Nan Hai's cinema operations by around 20%. Dadi and OSGH operated a total of 2,422 screens in 2016.

Nan Hai has diversified its revenue base to non-ticket sales, such as concessionary sales and advertising. The contribution of non-ticket revenue to total cinema revenue increased to around 22% in 2016, from 18% in 2015. Such revenues also help reduce potential cyclicality in its cinema revenue.

On the other hand, the financial profile of the cinema business is constrained by (1) its small scale when compared with global peers, (2) weak financial profile due to high debt leverage from its expansion, and (3) intense competition in China's cinema industry.

Nan Hai's B1 CFR has incorporated Moody's expectation that the company will deleverage, with adjusted debt/EBITDA falling to around 5.0x in the next 12-18 months, from 5.8x in 2016 and 11.3x in 2015.

Such deleveraging trend will be driven by (1) net cash inflow from its property business, (2) EBITDA growth in both its property and cinema businesses, and (3) contained debt growth through strong discipline and caution in acquisitions of cinemas and non-core businesses.

Nan Hai's liquidity is adequate. At the end of June 2017, its cash balance -- including short-term pledged and restricted bank deposits -- totaled HKD10.6 billion, which was sufficient to cover its short-term debt of HKD6.2 billion.

Nan Hai's senior unsecured rating is notched down to B2 from Nan Hai's CFR of B1, reflecting the material subordination risk for bond holders arising from the high levels of priority debt and claims at Nan Hai's operating subsidiaries.

Moody's expects that the company's priority debt will remain well above 15% of the company's total assets, given its sizable onshore funding needs over the next 12-18 months.

The stable rating outlook reflects Moody's expectation that Nan Hai will sustain revenue and profit growth in its property and cinema operations businesses, while continuing to deleverage and maintaining an adequate liquidity position.

Upward rating pressure could emerge if the company: (1) improves its scale and expands its cinema operations with stable profit margins, so that such operations account for more than 50% of revenue and EBITDA, (2) improves its debt leverage, and (3) maintains adequate liquidity and good access to the debt and capital markets.

Metrics indicative of upward rating pressure include adjusted debt/EBITDA below 4.0x.

On the other hand, downward rating pressure could arise if the company (1) experiences lower-than-expected property contracted sales and cash flow, (2) fails to deleverage, (3) undertakes aggressive acquisitions outside of its property and cinema businesses, or (4) experiences a deteriorating liquidity position.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Hong Kong, Nan Hai Corporation Limited is engaged in various businesses, including culture and media services, property development, enterprise cloud services and new media.

Listed on the Hong Kong Stock Exchange in 1991, the company was 54% owned by its chairman, Mr. Yu Pun Hoi at end June 2017.

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.

Franco Leung
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

No Related Data.
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