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Rating Action:

Moody's changes Health & Happiness' ratings outlook to positive

 The document has been translated in other languages

10 Jul 2018

Hong Kong, July 10, 2018 -- Moody's Investors Service has changed to positive from stable the outlook on Health and Happiness (H&H) International Holdings Limited's Ba2 corporate family rating and Ba3 senior unsecured rating.

At the same time, Moody's has affirmed the company's ratings.

RATINGS RATIONALE

"The positive ratings outlook reflects Moody's expectation that H&H will expand its revenue scale and deleverage over the next 12-18 months," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.

H&H has shown a good track record of revenue growth. Its revenue rose 24% year-on-year in 2017 to RMB8.1 billion, driven by 22% year-on-year growth in revenue for baby nutrition and care products, which include infant milk formula (IMF), probiotic supplements and other pediatric products, and 27% year-on-year growth in adult nutrition and care products, which consist mainly of vitamin, herbal and mineral supplements (VHMS).

H&H's revenue growth is supported by a favorable business environment in China (A1 stable). Its premium and new organic IMF products enjoy good demand in China where consumers have a preference for quality products. Its probiotic supplements have also registered strong growth, spurred by effective marketing, and its adult nutrition and care products' growth is driven by rising consumer demand for Swisse Wellness Group Pty Ltd's (Swisse) VHMS products.

Accordingly, Moody's expects that H&H's revenue will grow at about 17% year-on-year over the next 12-18 months, reflecting growth in its baby nutrition and care products, as well as adult nutrition and care products.

H&H has maintained its position as a leading domestic IMF provider in China. The company ranked first among domestic IMF providers and sixth among domestic and foreign IMF providers in 2017, according to Nielsen.

The company's VHMS provider Swisse retained its leading position in the Australian VHMS market, with a 16.1% market share for the 12 months ended 31 December 2017, according to IRI.

Given H&H's leading market position and asset-light model, Moody's expects the company will maintain its EBITDA margins at around 26.5% and positive free cash flow over the next 12 -- 18 months. The company has maintained positive free cash flow since 2014, with free cash flow reaching RMB974 million in 2017. Such positive free cash flow will enable the company to reduce its debt.

Consequently, the company's adjusted debt/EBITDA will be expected to improve to around 1.9x in the next 12-18 months from 2.9x in 2017 and from 4.6x in 2016. This level of debt leverage is strong for its Ba2 corporate family rating.

H&H's liquidity profile is sufficient. At the end of 2017, its cash balance — including restricted cash — totaled RMB2.1 billion, which was sufficient to cover its short-term debt of RMB793 million.

The company has also shown a track record of refinancing its debt. It secured a USD300 million three-year term loan in June 2018 to refinance the outstanding portion of its existing USD450 million term loan that will mature in April 2019.

H&H's Ba2 corporate family rating reflects (1) the company's leading position among domestic IMF providers in China and diversification into a leading position in Australia's (Aaa stable) vitamin, herbal and mineral supplements (VHMS) market, (2) the favorable demand trend for IMF in China and VHMS in Australia and China, and (3) the company's strong profitability and steady cash flow generation, which reflect in turn its brand equity and the confidence-sensitive nature of its products.

However, the rating is constrained by (1) its developing scale in competitive markets, and (2) regulatory and product safety risks.

Upward rating pressure could arise if (1) the company maintains a strong market position in the IMF and VHMS segments; (2) its revenue scale expands; (3) it maintains a conservative financial policy and strong liquidity position, such as sustainable positive free cash flow, conservative dividend payouts, and cash/short term debt exceeding 1.5x -- 2.0x; and (4) it achieves debt leverage, such that debt/EBITDA falls below 2x on a sustained basis, while maintaining steady EBIT margins and growing its revenue scale.

On the other hand, the ratings outlook could return to stable if H&H is unlikely to meet the upgrade conditions over the next 12-18 months.

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

Health and Happiness (H&H) International Holdings Limited is a leading domestic infant milk formula provider in China and leading Australian vitamin, herbal and mineral supplements (VHMS) provider. The company acquired an 83% stake in Australian VHMS provider Swisse Wellness Group Pty Ltd in September 2015, and further raised its stake to 100% in February 2017.

Established in 1999, H&H is headquartered in Guangzhou and listed on the Hong Kong Stock Exchange in December 2010. Its chairman and CEO, Mr. LUO Fei, and other principal shareholders together held a 71% stake in the company at the end of 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.

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
VP - Senior Credit Officer
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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