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Rating Action:

Moody's assigns first-time B2 CFR to HC International; outlook stable

 The document has been translated in other languages

02 Feb 2018

Hong Kong, February 02, 2018 -- Moody's Investors Service has assigned a B2 corporate family rating (CFR) to HC International, Inc. (HC)

This is the first time that Moody's has assigned a rating to HC.

At the same time, Moody's has assigned a B2 senior unsecured rating to the proposed bonds to be issued by HC Innovest Holdings Limited -- a subsidiary of HC -- based on the fully and unconditionally guarantee provided by HC.

The ratings outlook is stable.

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

The proceeds from the proposed issuance will be used to repay HC's existing indebtedness and for general corporate purposes.

RATINGS RATIONALE

"The B2 rating reflects HC's fast-growing operations and established position in China's business-to-business eCommerce market," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

"Its core business-to-business platform provides consistent recurring cash flow and its expanded service scope raises customer stickiness," adds Choi.

HC has more than 25 years of operational experience in the business-to-business (B2B) eCommerce industry in China. It was one of the earliest provider of primary business information, and ranks among the top two B2B eCommerce companies in China, with a market share of around 7.9% by revenue in 1H 2017, according to the China E-Commerce Research Center.

HC's CFR also reflects its steady revenue growth, driven primarily by solid market demand for B2B services in China. Moody's expects that the company's annual revenue will exceed RMB3.5 billion by the end of 2018 from RMB1.9 billion in 2016.

The robust demand growth is supported by small- and medium-sized enterprises (SMEs) allocating a higher portion of their advertising and marketing budgets to online B2B platforms -- compared to their traditional offline channels -- as well as a favorable government policy encouraging supply chain cost savings.

HC has been actively expanding its scale and service scope to capitalize on market demand. Specifically, it has adopted a strategy of vertical integration of its services, establishing itself as the "one-stop shop" for SMEs to market their products, find customers, and eventually transact on the same platform.

This integrated full service model increases the stickiness of its subscribers. The business model also helps HC gather upstream and downstream demand and supply information, enhance its understanding of its customers, and raise monetization potential.

HC's rating also considers the company's evolving business profile in a highly competitive industry, as well as its fast growing finance business, which is associated with higher financial and execution risks when compared with its core business.

HC has expanded its scale through acquisitions, and these transactions have introduced volatilities in the company's performance over the last few years. Moody's says that such volatility should continue over the next few years, as HC integrates acquired businesses into its own platform.

And, as HC expands its service scope and offers transaction-based services — where it takes on inventory from suppliers on its platform — its profit margins will fall, because the transaction-based business carries lower margins.

Moody's expects that HC's adjusted EBITDA margins will fall to around 15%-18% over the next two years from around 25% in 2016, driven primarily by a higher proportion of transaction-based business.

HC's wholly-owned finance unit provides loans to customers on its B2B platform. The finance unit's loan book totaled around RMB1.44 billion at 30 June 2017, and the loan book size should increase to RMB2.9-RMB3.6 billion over the next 12-18 months.

Moody's is concerned about the growth of this higher-risk business, which is exposed to SME financing risks in China. Furthermore, the continued growth of the finance business will raise HC's leverage level, with such a situation proving negative for its rating.

Moody's expects that HC will maintain its adjusted debt/EBITDA at 3.5x-4.0x over the next 12-18 months, because its EBITDA growth is partially offset by debt increases, due to the consolidation of the finance unit.

Nevertheless, HC's likely growth in earnings from its core operations will provide some financial buffer to absorb a potential moderate loss from its new and high-risk finance business.

HC's liquidity is weak. As of 30 June 2017, it held around RMB781 million in cash, cash equivalents and listed securities. These liquid assets, taken in consideration with an estimated annual operating cash flow of around RMB300-RMB350 million, meant that HC's internal cash flow was insufficient to cover its RMB1.4-RMB1.5 billion of aggregated short-term obligations and likely capital expenditure.

However, HC's proposed USD bond issuance, if successful, will improve its debt maturity profile and strengthen its liquidity.

HC's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because the holding company owns key licenses to operate its business, which will support an expected recovery in the holding company's debt.

The stable rating outlook reflects Moody's expectation that HC will: (1) maintain its market position as a leading B2B service provider in China; (2) continue to grow its revenue scale and maintain profitability; and (3) demonstrate prudent financial management to preserve a sufficient buffer for its finance business.

Upward ratings pressure could arise if HC: (1) demonstrates sustainable revenue and EBITDA growth and successfully integrates its newly acquired businesses; (2) contains its exposure to the financial, reputation and execution risk related to the finance business; (3) deleverages and improves its debt maturity profile; and (4) starts to generate positive free cash flow on a consistent basis.

Credit metrics indicating a potential rating upgrade include the following on a sustained basis: EBITDA margins of 20%-22%, and adjusted debt/EBITDA — including debt from its finance unit — below 2.5x-3.0x.

On the other hand, Moody's will likely downgrade the company's ratings if HC:

(1) Fails to maintain a steady EBITDA trend, due to a substantial decline in its core business and market share, which could affect its cash flow generation;

(2) Experiences significant financial impairment or capital calls from its finance business;

(3) Engages in aggressive acquisitions that pressure its balance sheet liquidity or raise its overall risk profile; or

(4) Shows a deterioration in its profit margin and weakened liquidity, due to increased competition or poor working capital management.

Metrics that would point to a downgrade include the following on a sustained basis: EBITDA margins unable to stabilize in the area of 15%, or adjusted debt/EBITDA — including debt from its finance unit — trending toward 5.0x.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1992 and listed on the Hong Kong Stock Exchange in 2003, HC International, Inc. is one of the leading B2B eCommerce operators in China. HC provides one-stop integrated B2B business solutions and a supply and demand platform for SMEs.

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

No Related Data.
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