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Rating Action:

Moody's assigns first-time Ba3 rating to China Minzhong

 The document has been translated in other languages

08 Mar 2013

Hong Kong, March 08, 2013 -- Moody's Investors Service has assigned Ba3 corporate family and senior unsecured debt ratings to China Minzhong Food Corporation Limited.

At the same time, Moody's has assigned a Ba3 rating to China Minzhong's proposed USD bonds.

This is the first time that Moody's has assigned ratings to China Minzhong.

The outlook for the ratings is stable.

RATINGS RATIONALE

"China Minzhong's Ba3 rating reflects its established business model. It provides a wide range of processed vegetables to overseas markets, shows a track record of food safety and quality assurance, demonstrates improved techniques for cultivation and processing, and offers high-value new products," says Lina Choi, a Moody's Vice President and Senior Analyst.

"China Minzhong is well positioned to grow, supported by the increase in demand for safe and quality vegetables in China," says Choi, who is also the lead analyst for Minzhong.

Steadily growing domestic vegetable consumption is the biggest factor supporting China Minzhong, especially as it has the scale to further expand both in size and in product variety.

In response to multiple negative food safety events in the past two years, the Chinese government has stepped up industry regulation, and encouraged industrialization and consolidation of the industry. These developments provide a favorable environment for China Minzhong to grow its business and reinforce its market position.

"China Minzhong's unique integrated business model -- which encompasses fresh food cultivation and food processing -- also provides flexibility in a sector where product prices may be volatile," says Choi.

"However, the rating is also constrained by the challenges of consistently rising costs in labor, farmland acquisitions and raw materials, which could become material as the company plans to expand its industrialized farming facilities and raise the yield of various mushroom products for the domestic market", says Choi.

Despite its track record and experience in fresh crop cultivation, China Minzhong's home market in China remains highly fragmented and competitive. Cost inflation is unlikely to abate in the near term, and a strong RMB diminishes its competitiveness in the export business.

China Minzhong is also pursuing the cultivation and processing of high-priced vegetables, such as the king oyster mushrooms, for domestic consumption to achieve new sales and high profit margins to counter the weakness in the European market and the rising cost of production.

This new domestic business demands skill in increasing its customer base and collecting receivables. China Minzhong has to demonstrate that it can execute such new business initiatives and preserve its strong credit metrics -- Adjusted debt/EBITDA should stay at around 1x, while EBITDA/interest should stay well over 6x in the next three years.

China Minzhong has sufficient liquidity. Its operating cash flow of more than RMB1 billion and cash on hand of around RMB300 million will be enough to cover committed capital expenditures and short-term debt.

The stable outlook reflects Moody's expectation that Minzhong will maintain stable revenue streams and profitability from its processed vegetable business with a satisfactory record of product quality and safety. The company is also expected to maintain its current strong credit metrics, while expanding its cultivation capacity and new product investments.

Upward rating pressure is limited in the near term as the company is expanding its domestic business. However, positive rating momentum may arise if the company (1) successfully expands the sales of its high value products, such as organic fresh vegetables and king oyster mushrooms in the local market, thereby providing another stable revenue stream and reducing the impact of lower cost competitiveness in export markets; (2) avoids any deterioration in its cash conversion cycle; and (3) maintains steady profitability and low debt leverage.

On the other hand, downward rating pressure may arise if the company (1) encounters any product quality and food safety failures which significantly affect its corporate image and businesses; (2) fails to maintain stable revenue contributions from its export of processed vegetables, which could result from competition from producers in China, or other low cost countries; (3) engages in aggressive capital spending or farmland acquisitions, which pressure its liquidity position and balance sheet strength; or (4) its profitability weakens and leverage increases, such that Debt/EBITDA exceeds 4x.

The principal methodology used in this rating was Global Food - Protein and Agriculture Industry Methodology published in September 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Listed on the Singapore Stock Exchange in April 2010 and started as a collective enterprise specializing in dehydrated vegetables, China Minzhong Food Corporation Ltd has been operating its vegetable processing business for 40 years. It produces more than 100 types of processed vegetables for customers in 26 countries.

PT Indofood (29.3%) and Franklin Templeton Investments (11.1%) are the two major shareholders with a collective 40.4% ownership.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time Ba3 rating to China Minzhong
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