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Rating Action:

Moody's changes Texhong's outlook to stable; affirms Ba3 ratings

 The document has been translated in other languages

11 Mar 2016

Hong Kong, March 11, 2016 -- Moody's Investors Service has changed to stable from negative the outlook on Texhong Textile Group Limited's Ba3 corporate family and senior unsecured bond ratings.

Moody's has also affirmed both ratings.

RATINGS RATIONALE

"The outlook revision reflects Texhong's improved profitability as the company has grown its revenue and improved its adjusted EBITDA margin despite China's weak economic environment," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

Texhong's revenue grew by a modest 1.0% to RMB10.6 billion in 2015, mainly driven by a 10.5% increase in sales volume of yarn but offset by lower average selling prices (ASPs).

The strong volume growth was supported by its diversified customer base and extended product offerings.

Moody's expects revenue to grow by 5% per year in 2016 and 2017, underpinned mainly by sales volume growth, and partially offset by a modest decline in ASPs.

Its new yarn production capacities in Vietnam (B1 stable) and Xinjiang are expected to commence commercial operations in 2Q 2016 and 3Q 2016, respectively.

Its adjusted EBITDA margin improved to 15.9% in 2015 from 10.1% in 2014, largely due to an improved reported gross margin of 18.0% in 2015 from 12.4% in 2014.

The improved gross margin was driven mainly by lower cotton input costs and an improved product mix.

Moody's expects its adjusted EBITDA margin to remain stable at the current levels over the next two years, supported by a relatively stable gross margin.

Moody's does not expect a significant decline in cotton prices in a short period of time as prices declined significantly in China (Aa3 negative) in 2011 and 2014, limiting negative gross margin volatility.

At the same time, Moody's expects the company to maintain its current favorable product mix.

Therefore, its adjusted EBITDA grew by 58.5% to RMB1.68 billion in 2015 from RMB1.06 billion in 2014.

"The stable outlook also reflects Texhong's improved financial leverage, which is at a level that is in line with its Ba3 ratings," says Lu, who is also the Lead Analyst for Texhong.

Driven by improved earnings, Texhong's adjusted debt/EBITDA improved to 4.0x in 2015 from 4.7x in 2014 despite a higher adjusted debt level.

Its total adjusted debt grew by 32.7% to RMB6.67 billion at end-2015 from RMB5.03 billion at end-2014, driven by higher capital expenditure (capex) and a greater cash balance at end-2015 to prepare for a debt repayment of about RMB1.0 billion in January 2016.

Moody's expects its adjusted debt/EBITDA to decline to about 3.5x over the next two years, owing to expected positive cash flow from operations and lower capex.

This level of leverage is in line with its Ba3 ratings.

The Ba3 ratings reflect Texhong's modest position in China's fragmented yarn market.

The ratings also take into consideration the exposure of Texhong's profit margins to market price fluctuations, including the purchase price of raw materials and selling prices for yarn, the latter of which are sensitive to end-user demand for downstream apparel and textile products.

At the same time, the company's ratings are supported by Texhong's diversified customer base, the steady apparel demand in China, driven by steady growth in domestic consumption levels, and the expected stable gross margin.

The expansion of Texhong's production facilities in Vietnam allows the company to use more competitively priced cotton, which improves its margins, given that the international cotton price is generally lower than the price in China.

Texhong's liquidity position is weak. At end-2015, the company held cash and cash equivalents of RMB1.94 billion, pledged bank deposits of RMB248 million, and unused committed banking facilities of RMB564 million.

These liquidity sources and its expected operating cash flows of around RMB0.9 billion over the next 12 months are insufficient to cover its RMB1.66 billion in maturing debt, bills payable of RMB2.11 billion and estimated maintenance capex of RMB200 million over the next 12 months.

However, the company had around RMB0.7 billion in bills receivable and RMB1.89 billion in inventory, mostly cotton, which is marketable. These can be discounted for cash to support its liquidity position.

The ratings could be upgraded if Texhong continues to grow its revenues and improves its liquidity profile, while maintaining its profitability and stable financial profile.

Furthermore, Moody's will consider debt/EBITDA staying below 2.5x and its EBITDA margin staying above 15% on a sustained basis as an indication of a possible upgrade.

Texhong's ratings could be downgraded if: (1) the company adopts an aggressive cotton-procurement strategy, increasing its exposure to cotton-price fluctuations; (2) its debt remains elevated due to aggressive capacity and downstream expansion and/or large working capital deficits; (3) its profitability remains weak; and/or (4) its liquidity deteriorates significantly.

Moody's would also consider a ratings downgrade if the company's adjusted debt/EBITDA consistently exceeded 4.0x-4.5x and its adjusted EBITDA margin stayed below 10% on a sustained basis.

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1997 and listed on the Hong Kong Stock Exchange since 2004, Texhong Textile Group Limited specializes in producing core-spun yarn and textile products.

The company currently operates 15 yarn production bases: 12 in the Yangtze River Delta and Shandong Province in China and three in Vietnam. Its chairman, Mr. Tianzhu Hong, holds an approximate 55% stake in the company.

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.

Chenyi Lu
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 changes Texhong's outlook to stable; affirms Ba3 ratings
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