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Global Credit Research - 03 Nov 2010
Hong Kong, November 03, 2010 -- Moody's Investors Service has assigned a Ba3 corporate family rating and
a provisional (P)Ba3 senior unsecured bond rating to China Forestry Holdings
The outlook for the ratings is stable. This is the first time that
Moody's has assigned ratings to China Forestry.
Moody's expects to affirm the bond rating and remove it from provisional
status after the proposed bond issue is completed and Moody's is satisfied
with the final terms and conditions.
The proceeds from the bonds will be used to acquire forestry assets and
for general corporate purposes.
"China Forestry's Ba3 rating reflects the company's
forestry assets, characterized by high stock density and immediately
harvestable trees. This allows the company the flexibility to ramp
up its cash flow amid healthy regional demand for its logs,"
says Ken Chan, a Moody's Vice President.
"The rating also reflects China Forestry's low cost base,
the result of its prepaid acquisition model. This puts the company
in a competitive position to acquire further assets at favorable prices
despite the expected increase in demand for forestry assets over the medium
term," added Chan.
"Furthermore, the rating takes into account China's
robust economic growth, which sustains demand for domestic logs
and wood products and favors the business growth of upstream players such
as China Forestry. Moreover, government policy remains favorable,
supporting the industry's long-term growth."
"On the down side, the rating is constrained by the company's
geographic concentration, fast growth, and short operating
history," says Chan, adding that "we expect that
the company will face more challenges as it expands its reserve and sales
coverage to other Chinese provinces."
"Another factor limiting the rating is the company's negative
free cash flow, which is due to heavy investment capital expenditures
and upfront cash payments - usually in the first two years of acquisition
- for the forestry land use rights."
"China Forestry's short history and fast growth have resulted
in credit metrics reflective of a low Ba level" says Chan.
Over the next two years, the company's projected cash flow-to-debt
metrics, such as Retained Cash Flow/Adjusted Debt, is projected
to improve to over 20% as harvest volume increases.
The stable outlook on the rating reflects Moody's expectation that
the company will continue to focus on upstream operations, maintain
profitable operations, grow its cash flow, and progressively
improve its retained cash flow, which will fund modest expansion.
Upward rating pressure in the near term is limited, given the company's
short operating history. Over the medium term, however,
positive rating pressure may arise if the company (1) successfully implements
its business model, growing its forestry plantation base and raising
its harvest rate; and (2) remains financially prudent, managing
its acquisitions and improving its retained cash, such that its
Retained Cash Flow/Debt rises above 35%-40% and EBIT/Interest
rises above 5.0x.
Downward rating pressure will arise if (1) the company fails to ramp up
its operating cash flow; 2) demand for wood products decline and
negatively affects the company's credit profile; or (3) the
company expands aggressively such that its Retailed Cash Flow/Debt falls
below 15%- 20% and EBIT/Interest falls below 3.0x
over the cycle.
China Forestry's ratings have been assigned based on factors that Moody's
believe are relevant to the risk profile of China Forestry, such
as the company's (i) business risk and competitive position compared with
other firms within the industry; (ii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk. These
attributes were compared against other issuers both within and outside
China Forestry's core industry; Moody's believes the company's ratings
are comparable with those of other issuers of similar credit risk.
China Forestry, listed on the Hong Kong Stock Exchange in 2009,
is one of the largest privately owned upstream forest operators in China
in terms of coverage area of owned forest rights. The company's
forestry assets are located mainly in Sichuan and Yunnan provinces.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
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MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
VP - Senior Credit Officer
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.
Moody's assigns first-time (P)Ba3 rating to China Forestry
24/F One Pacific Place
China (Hong Kong S.A.R.)
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