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Rating Action:

Moody's changes Yihua Group's outlook to negative

 The document has been translated in other languages

08 Nov 2018

Hong Kong, November 08, 2018 -- Moody's Investors Service ("Moody's") has affirmed the B2 corporate family rating of Yihua Enterprise (Group) Co., Ltd. (Yihua Group) and affirmed the B3 backed senior unsecured notes issued by Yihua Overseas Investment Ltd. The notes are guaranteed by Yihua Group.

Moody's has also changed the outlook on the ratings above to negative from stable.

RATINGS RATIONALE

The negative outlook on Yihua Group's ratings reflect Moody's concerns over the company's higher earnings volatility and refinancing risks in the next 12-18 months.

"More challenging macro and funding conditions in the coming 12-18 months will raise the company's earnings volatility and refinancing risks, thereby narrowing its rating headroom," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

We project Yihua Group's adjusted debt/EBITDA will rise toward 7.5x in the next 12-18 months, from 6.3x in FY2017. Our projection reflects the ongoing US-China trade tension may slow the group's revenue growth and lower its profitability, thereby increasing its leverage ratio. The projected adjusted debt/EBITDA ratio has narrowed the company's rating headroom.

US exports under Yihua Lifestyle - a key listed-subsidiary of Yihua Group - accounts for around 30% of Yihua Lifestyle's total revenue. In the first nine months of 2018, Yihua Lifestyle's profitability has declined moderately, namely affected by a rise in raw material cost and currency movements. In the first nine months of 2018, Yihua Lifestyle contributed to around 67% of Yihua Group's total revenue.

On the other hand, the company has high refinancing needs in the next 12-18 months. At the end of 3Q 2018, the company had RMB5.9 billion of cash and projected annual operating cash flow of around RMB1.5 billion in the next 12 months. However, it has debt obligations maturing over the next 12 months, namely RMB8.6 billion in short-term bank borrowings, long-term bank borrowings due within one year and maturing onshore bonds, as well as RMB1.0 billion in onshore puttable bonds.

Beyond the next 12 months, the company has to refinance RMB1.5 billion of onshore bonds due and RMB1.2 billion of puttable bonds in 4Q 2019.

Moody's notes that Yihua has maintained access to the domestic bond market, and issued RMB700 million and RMB500 million at the end of October 2018, at 7.2% and 7.5%, with three year tenure puttable at the end of second year. We also note that Yihua has land and financial assets as alternative liquidity and external sources.

Moody's will monitor the company's liquidity in the next 6-12 months, through refinancing its existing debt or other asset disposal plans.

Given the negative ratings outlook, Moody's will unlikely upgrade Yihua's ratings over the next 12-18 months.

Nevertheless, the ratings outlook could return to stable if the company: (1) shows meaningful improvement in its liquidity under satisfactory terms and conditions; (2) maintain stable operations and a conservative acquisition strategy; and (3) continues to maintain stable financial metrics, such that adjusted debt/ EBITDA is below 7.5x.

Yihua Group's rating is likely to be downgraded if the company fails to improve its liquidity or maintain stable operations. Specifically, downgrade pressure will emerge if the company's (1) adjusted debt/EBITDA exceeds 7.5x on a sustained basis; or (2) shareholdings in Yihua Lifestyle and Yihua Healthcare show a material decline; or (3) weak liquidity persists.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Yihua Enterprise (Group) Co., Ltd. (Yihua Group) was established in April 1995 and is based in Shantou, China. Yihua Group is a diversified private company that operates in four key segments: (1) furniture manufacturing, (2) healthcare, (3) property development, and (4) financial investment. As of the end of September 2018, the company held 29.02% and 37.08% stakes in two listed companies, Yihua Lifestyle and Yihua Healthcare, respectively. Yihua Lifestyle and Yihua Healthcare's market cap is around RMB6.4 billion and RMB9 billion respectively as of 6 November 2018.

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.

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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.

Stephanie Lau
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

Clement Wong
Associate Managing Director
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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