Hong Kong, January 16, 2019 -- Moody's Investors Service has assigned a first-time B2 corporate
family rating (CFR) to Century Sunshine Group Holdings Limited.
At the same time, Moody's has assigned a B2 senior unsecured
rating to Century Sunshine's proposed green bonds.
The outlook for the ratings is stable.
The bond rating reflects Moody's expectation that Century Sunshine will
complete the bond issuance upon satisfactory terms and conditions,
including proper registrations with the National Development and Reform
Commission in China (A1 stable).
The proceeds from the bonds will be used for refinancing and investments.
RATINGS RATIONALE
"Century Sunshine's B2 corporate family rating reflects its
long track record of operating in the organic fertilizer industry,
good profitability -- stemming from its focus on specialized and
higher margin products -- and moderate debt leverage,"
says Gerwin Ho, a Moody's Vice President and Senior Credit
Officer.
Century Sunshine -- through its long track record of almost 20 years
-- has built up the expertise to support the company's
growth.
The company's acquisition and consolidation in 2017 of Shandong
Hongri Chemical Joint Stock Company, Ltd., which has
over 50 years of experience producing and selling fertilizers in China,
has further strengthened its operations in terms of its production scale
and distribution network.
Century Sunshine also demonstrates robust profitability. Its adjusted
EBITDA margin is high for its rating level, reaching 18.4%
in the 12 months ended June 2018.
Its good profitability stems, as mentioned, from its focus
on specialized and higher margin products, namely functional and
organic fertilizers, and rare earth magnesium alloys.
Moody's expects its EBITDA margin to reach about 18.4%
in the next 12-18 months, which remains high for its rating
level.
Century Sunshine has maintained moderate debt leverage, as measured
by adjusted debt/EBITDA, of 2.6x in the 12 months ended June
2018. The company also has a track record of funding growth through
non-debt financing.
Moody's expects adjusted debt/EBITDA to rise to about 3.6x
in the next 12-18 months as debt rises to fund capital spending
on the company's fertilizer business in Jiangxi Province.
"At the same time, the rating is constrained by the company's
developing scale in competitive markets, negative free cash flow
-- driven by high capital spending -- and
regulatory risks," adds Ho, also the Lead Analyst for
Century Sunshine.
Century Sunshine operates in a competitive and fragmented fertilizer market.
Despite its long operating track record, the company is still developing
its scale because of its focus on higher margin organic and functional
fertilizers.
Moody's expects its share of the compound fertilizer market will
grow as it expands capacity and sales volume.
Century Sunshine posted negative free cash flow from 2013 to 2017 because
of capital spending to expand its fertilizer and magnesium product businesses,
despite it having reported positive cash flow from operations and having
followed a prudent dividend policy over the same period.
Moody's expects Century Sunshine to post negative free cash flow
in the next 12 to 18 months as it continues to expand its fertilizer facility
in Jiangxi Province and its magnesium facility in Xinjiang.
Century Sunshine's businesses are affected by environmental and
operational safety laws and regulations in China, and any inability
to comply could hamper the company's production and reputation,
with operational and financial impacts.
The company's liquidity profile is weak. Its cash holding
of HKD1.02 billion at the end of June 2018 was insufficient to
cover its short-term debt of HKD1.04 billion.
Nonetheless, Moody's expects that the company can roll over
its debt with domestic banks, given its profitable operations,
strong market position and established relations with these banks.
In addition, it has proven access to offshore capital markets and
equity funding through its listing in Hong Kong.
Century Sunshine's senior unsecured rating is not affected by subordination
to claims at the operating company level as the company's diversified
business profile — with product exposures to fertilizers and magnesium
— mitigates structural subordination risk.
The stable rating outlook reflects Moody's expectations that Century
Sunshine will increase its revenue as it expands its capacity and maintain
its profitability; its financial profile will remain consistent with
the current rating category over the next 12-18 months; and
it will be able to refinance its short-term debt.
Century Sunshine's rating would likely be upgraded if the company
(1) continues to increase revenue as it expands its capacity and maintain
profitability, with an EBITDA margin above 20%; (2)
improves its credit metrics, such that adjusted debt/EBITDA falls
to 3.0x on a sustained basis; and (3) strengthens its liquidity,
such that its cash/short-term debt is above 100% on a sustained
basis.
The rating would likely be downgraded if (1) Century Sunshine is unable
to increase revenue as it expands its capacity; (2) its profitability
weakens significantly; (3) its credit metrics deteriorate,
such that adjusted debt/EBITDA exceeds 4.5x-5.0x
on a sustained basis; or (4) its liquidity weakens significantly.
The principal methodology used in these ratings was Chemical Industry
published in January 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Listed in Hong Kong in 2004, Century Sunshine Group Holdings Limited
manufactures and sells fertilizers, including the general,
ecological and functional varieties. The company is also engaged
in magnesium mining and magnesium alloy production through Rare Earth
Magnesium Technology Group Holdings Limited, its Hong Kong main-board
listed, 72.4%-owned subsidiary as of the end
of June 2018.
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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
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
