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Rating Action:

Moody's assigns first-time Baa2 issuer rating to Sunny Optical; outlook stable

 The document has been translated in other languages

10 Jan 2018

Hong Kong, January 10, 2018 -- Moody's Investors Service has assigned a first-time Baa2 issuer rating to Sunny Optical Technology (Group) Company Limited.

At the same time, Moody's has assigned a Baa2 senior unsecured rating to the proposed bonds to be issued by Sunny Optical.

The ratings outlook is stable.

The bond rating reflects Moody's expectation that Sunny Optical will complete the bond issuance upon satisfactory terms and conditions, including proper registrations with the National Development and Reform Commission and the State Administration of Foreign Exchange in China (A1 stable).

The proceeds from the proposed issuance will be used to fund capital expenditures, fulfill working capital requirements, refinance existing indebtedness and other general corporate purposes.

RATINGS RATIONALE

"Sunny Optical's Baa2 issuer rating reflects the company's position as a strong global optical components specialist, with growing and diversifying end markets and applications, and long operating track record of more than 30 years," says Gerwin Ho, a Moody's Vice President and Senior Analyst.

Sunny Optical's strength is evident from its ability to compete against global competitors and to supply its products to leading mobile phone, auto, consumer electronic and optical instrument makers.

The company has also demonstrated its adaptability to changing market and product demands, while maintaining revenue and net profit growth, since its founding in 1984.

"Sunny Optical's Baa2 issuer rating also considers the company's prudent financial management, as evidenced by its low debt leverage, net cash position and strong liquidity," adds Ho, who is also Moody's Lead Analyst for Sunny Optical.

The company has a track record of balanced funding using equity and debt, and a focus on growth through organic investments and prudent spending on capital expenditure, such that it generated positive free cash flow in six of the 10 years between 2007 and 2016, while achieving strong revenue growth.

Moody's expects that Sunny Optical's debt leverage — as measured by debt/EBITDA — will rise to about 1.3x in 2018 from about 0.7x in 2017, as the company prefunds its capacity expansion during 2018-2019. Leverage will likely improve to about 1.0x in 2019, as EBITDA rises. Such leverage levels are strong for its rating.

The company's liquidity profile is strong. In particular, it has since 2007 maintained a net cash position.

On the other hand, the rating is constrained by the low visibility of the company's product demand, driven by end products that evolve with rapidly changing technology, product specifications and customer demands.

Nevertheless, Sunny Optical has the experience and capability to adapt to advances in technology, as well as changing product specifications and customer demands. Specifically, the company has shown a track record of maintaining its focus in the optical components industry, while growing its business, against the backdrop of changes in end demand over more than 30 years.

The Baa2 issuer rating also takes into account Sunny Optical's end market and customer concentration risk, factors which are in turn mitigated by: (1) the large, stable and rising demand for mobile phones, reflecting these products' high penetration globally and the fact that mobile phones are essential modern communication tools; and (2) the proliferation of cameras and optical sensors in new and diverse end markets and applications that translate to growing demand for optical components over the next three to five years.

Sunny Optical's rating also factors in the risk of structural subordination due to its holding company status and the fact that the majority of the claims are at the operating subsidiaries.

The stable outlook on the company's issuer rating reflects Moody's expectation that Sunny Optical will: (1) grow its revenue and maintain its profitability levels; (2) retain its market position as a strong global optical components specialist; (3) demonstrate prudent financial discipline in terms of capital expenditure, investments and acquisitions; and (4) keep debt leverage low and its liquidity strong.

Rating upgrade pressure could arise over the medium term, if the company: (1) expands its revenue and improves its market position; (2) diversifies its product and customer exposures, which will provide a higher degree of stability to its revenue and profitability and therefore mitigate the low visibility of its product demand; and (3) continues its prudent financial management, as seen by a debt/EBITDA below 1.0x and a material net cash position.

On the other hand, rating downgrade pressure could arise, if the company shows: (1) weakening sales and/or a shrinking market position; (2) lower profitability in terms of its EBITA margin of below 10% on a sustained basis; or (3) a worsening in its credit profile, such that its adjusted debt/EBITDA exceeds 1.8x-2.0x or liquidity deteriorates to such an extent that cash to short term debt is less than 100% on a sustained basis.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Sunny Optical Technology (Group) Company Limited was founded in 1984 and listed in Hong Kong in 2007. The company is an industry leading integrated optical components and optical-related components manufacturer, with key products such as mobile phone lens sets, vehicle lens sets and mobile phone camera modules.

Revenues reached RMB19 billion in the 12 months to 30 June 2017. And, at 30 June 2017, the company was 35.5% owned by Sun Xu Limited, which is indirectly wholly owned by the Sunny Group Employee Offshore Trust.

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.

Gerwin Ho
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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