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Rating Action:

Moody's assigns first-time B2 to Yihua Enterprise Group

 The document has been translated in other languages

13 Sep 2017

Hong Kong, September 13, 2017 -- Moody's Investors Service has assigned a first-time B2 corporate family rating (CFR) to Yihua Enterprise (Group) Co., Ltd. (Yihua).

The rating outlook is stable.

RATINGS RATIONALE

"The B2 rating reflects Yihua's established track record and the stable EBITDA and cash flow generation from its listed furniture manufacturing business," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

Yihua only partially owns its core businesses. At end-March 2017, Yihua owned 29.02% of Yihua Lifestyle Technology Co., Ltd. and 37.08% of Yihua Healthcare Co., Ltd. However, it consolidates 100% of the two businesses into its financials, due to the extent of management control for both companies.

Yihua Lifestyle has been a leading manufacturer of furniture and wood flooring with its own brands since 1996. Its adjusted EBITDA registered RMB1.2-RMB1.4 billion per annum during the fiscal year ended 31 December 2015 (FY2015) and also for FY2016, while its operating cash flow was kept at around RMB1 billion over the same two years.

Moody's expects that Yihua Lifestyle will generate around RMB1 billion in adjusted EBITDA over the next 12-18 months.

"We also expect that the group's wholly-owned property development and financial investment businesses will improve its business diversity, revenue growth, and operating cash flow," adds Lau, who is also Moody's Lead Analyst for Yihua.

The group holds 4.0 million sqm of saleable, low-cost land in its land bank in Shantou, and for which it currently has no outstanding land premium. Moody's estimates that Yihua will achieve contracted sales of around RMB1.5-RMB2.0 billion over the next 12-18 months, which will provide good earnings profitability.

And, Moody's expects its financial investment portfolio will add around RMB400-RMB500 million of recurring cash flow over the next 12-18 months. Such a dividend income stream registered around RMB270-RMB400 million per annum in FY2014-2016. At end-March 2017, its portfolio of listed securities had an estimated market value of around RMB6.05 billion.

The rating also considers Yihua's diversified access to funding through its subsidiaries — Yihua Lifestyle and Yihua Healthcare — which are listed on the Shanghai and Shenzhen stock exchanges, respectively. Yihua also has a proven track record of onshore bond issuance for both the group and Yihua Lifestyle since 2007.

On the other hand, the rating factors in Yihua's status as a private company, and which consequently has less transparency and lower levels of corporate governance than publicly listed companies.

The rating also considers potential execution and expansion risks, mainly from its healthcare segment. Yihua's 37.08%-owned subsidiary, Yihua Healthcare, made RMB2.0 billion worth of acquisitions in FY2016. Moody's expects that this segment will require higher capital funding relative to its other existing business segments, which may raise leverage risk for the group.

Accordingly, Moody's expects that the company's adjusted EBITDA — accounting for the full consolidation of Yihua Lifestyle and Yihua Healthcare — will grow to around RMB2.6-RMB2.7 billion over the next 12-18 months from around RMB2.4 billion in 2016, propelled by higher revenue from its furniture business, improvements in its healthcare business, and a more significant contribution from its property development business.

Moody's expects that Yihua's leverage will fall from the 9.5x in FY2016's, because Moody's believes that the company will demonstrate more prudence in acquisitions and stronger levels of operating cash flow; thereby reducing its funding needs. As such, its debt leverage — as measured by adjusted debt/EBITDA — will fall from the post-acquisition level of 9.5x in FY2016 and improve to around 6.5x-7.0x over the next 12-18 months. Such a leverage metric positions the company at the single B rating level.

Yihua's rating also reflects the company's partial shareholding in Yihua Lifestyle and Yihua Healthcare. Yihua's ability to call freely on the cash of its core subsidiaries is uncertain, because its subsidiaries are regulated under public listing rules. Cash leakage to minority shareholders will also somewhat reduce Yihua's access to Yihua Lifestyle's profits.

On the other hand, such risks are partly mitigated by the holding company's possession of the largest shareholdings in both listed subsidiaries, and where it has strong board control via majority representation.

Yihua's liquidity is sufficient. The holding company's unrestricted cash of RMB108 million, short-term investment portfolio and around RMB1.2 billion of estimated annual operating cash inflow — representing cash dividends from its furniture and healthcare subsidiaries, operating cash flow from its property business, and recurring investment cash flow — projected as at 31 March 2017, are sufficient to cover its capex, acquisition needs, and short-term debt maturities at the holding company level over the next 12 months.

Its onshore bond issuance — totaling RMB1.0 billion and completed in May 2017 — has also improved its liquidity. If Yihua issues any senior unsecured notes at the holding company level, holders of such notes will be exposed to subordination risk, due to the high level of debt at the operating company level. Any ratings on such notes could be subject to notching from the group's corporate family rating.

The stable rating outlook reflects Moody's expectation that Yihua will grow earnings and cash flow, as well as gradually deleverage, while maintaining stable profitability and a disciplined approach to acquisitions. Moody's also assumes that Yihua will remain the largest shareholder in its two key subsidiaries, Yihua Lifestyle and Yihua Healthcare.

The rating could be upgraded, if the company improves its earnings, while maintaining stable operations and a conservative acquisition strategy. Specifically, Moody's would consider upgrading the rating if Yihua maintains an adjusted debt/EBITDA below 5.0x and adequate liquidity.

On the other hand, the rating could be downgraded, if the company fails to deleverage, or experiences a deterioration in its operating trends and financial profile. Specifically, downgrade pressure will emerge, if adjusted debt/EBITDA exceeds 7.5x on a sustained basis and liquidity becomes inadequate. A material decline in its shareholding of Yihua Lifestyle and Yihua Healthcare or operating cash flow could also pressure its rating.

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

Yihua Enterprise (Group) Co., Ltd. (Yihua), established since April 1995, is a diversified, private company that operates in four key segments: furniture manufacturing, healthcare, property development and financial investment.

The main fields of business for furniture manufacturing and healthcare are managed by Yihua Lifestyle Technology Co., Ltd. and Yihua Healthcare Co. Ltd. Both segments are respectively listed on the Shanghai and Shenzhen stock exchanges. At end-March 2017, Yihua held a 29.02% stake in Yihua Lifestyle and 37.08% shareholding in Yihua Healthcare.

Yihua was founded in 1995 and is based in Shantou. The company's chairman is Mr. Shaoxi Liu. Mr. Liu, along with Mr. Shaoshen Liu (brother of the chairman), Mr. Zhuangqing Liu (son of the chairman), owned a 100% effective shareholding in Yihua at 31 March 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.

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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.

Stephanie Lau
Vice President - Senior Analyst
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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