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04 Jan 2011
Hong Kong, January 04, 2011 -- Moody's Investors Service has assigned a Ba2 corporate family rating
to Texhong Textile Group Ltd and a provisional (P)Ba2 senior unsecured
rating to its planned USD notes issuance. The outlook for the ratings
is stable.
This is the first time that Moody's has assigned ratings to Texhong.
The bond proceeds are expected to be used for refinancing, capex
and other general corporate purposes.
Moody's expects to remove the provisional status of the bond rating when
the bond transaction is completed and its terms and conditions are satisfactory.
RATINGS RATIONALE
"Texhong has steady track records for its operating and financial
performances. Despite its focus on core-spun yarn --
that is a single textile product -- it has demonstrated
the ability to maintain its profitability and financial profiles over
the last industry cycle," says Elizabeth Allen, a Moody's
Vice President/Senior Credit Officer.
Texhong has a solid leverage profile and its credit metrics improved in
FY2009 and 1H2010, reflecting the growth in demand as well the first
full-year contribution from its production facility in Vietnam.
The company's expected debt/EBITDA of 2-3x positions it well
in its current rating level.
Moody's notes that Texhong's profit margin is affected by
movements in prices for cotton, its core raw material, and
which accounts for about 45% of cost of sales.
But, while the passing on of any price changes to its customers
involves a certain lead time, the shortness of its contract periods
and production cycle helps mitigate such a risk. It profitability
is most exposed when there is a sharp decline in cotton price.
It has maintained an average EBITDA margin of about 11% in the
last five years.
Texhong sells mainly in the domestic Chinese market and hence benefits
from the robust economic growth evident in China. But, this
market is fragmented with numerous players and the barrier of entry is
quite low.
In this context, Texhong's expansion of its production will
be in Vietnam, where it has been operating one facility since November
2007. Its operation there benefits from the absence of import duties
on cotton and the country's low labor costs. While it is
exposed to the inherent risk associated with an emerging market,
its performance there has thus far been good.
Moody's also notes that although the company has the ambition to
almost double its revenue to RMB10 billion in the coming few years,
its expansion plan is scalable. As a result, its credit profile
is largely driven by management's prudence in capex and investment
spending.
Texhong's liquidity profile is characterized by its reliance on
the rolling over of bilateral bank and trade lines to fund its working
capital. It has established relationships with domestic banks in
China and Vietnam, as well as international banks in Hong Kong.
It has total uncommitted facilities of about RMB1.3 billion,
of which about half is undrawn.
The bond rating is at the same level as the corporate family rating,
reflecting the lack of material structural subordination risk.
While there is significant debt at domestic PRC subsidiaries as well as
offshore intermediate holding companies, the non-PRC entities
will provide up-stream guarantees to the bond. The debt
at the non-guarantor PRC subsidiaries represented about 12%
of total assets as of October 2010 and this ratio is expected to remain
below 15% after the proposed bond issue.
The rating outlook is stable, reflecting the company's track
record in managing through the industry cycle and the expectation that
it will continue to adopt prudent expansion plans.
The rating could be upgraded if it continues its track record of growth,
while maintaining its profitability and strong financial profile.
Moody's would also expect to see an improved debt maturity and liquidity
profile. Furthermore, Moody's will consider debt/EBITDA
consistently below 2.5x and EBITDA margin consistently above 13-15%
as an indication for a possible upgrade.
On the other hand, the rating could be downgraded if, (1)
its liquidity profile deteriorates, (2) it expands into materially
large scale upstream or downstream businesses, or other businesses,
or (3) its leverage increases, such that debt/EBITDA exceeds 3.5-4x.
Rating methodology: In accordance with Moody's Rating Methodology:
Global Manufacturing Industry, published in December 2010.
Established in 1997, Texhong now operates 12 yarn production bases
-- 11 in the Yangtze River Delta region in China and one
in Vietnam. It specializes in core-spun yarn and textile
products. It has been listed on the Hong Kong Stock Exchange since
2004. Its founder, Mr Tianzhu Hong, holds 52.2%
of the company.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
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Please see ratings tab on the issuer/entity page on Moodys.com
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of each rating category and the definition of default and recovery.
Hong Kong
Elizabeth Allen
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's assigns first-time Ba2 ratings to Texhong Textile
No Related Data.
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