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Rating Action:

Moody's confirms Tingyi's Baa1 ratings; outlook negative

 The document has been translated in other languages

16 May 2016

Hong Kong, May 16, 2016 -- Moody's Investors Service has confirmed Tingyi (Cayman Islands) Holding Corp.'s Baa1 issuer and senior unsecured debt ratings.

Moody's has also confirmed the Baa1 rating on Tingyi's USD500 million bonds due 2017.

The outlook on the ratings is negative.

The rating actions conclude Moody's review of the ratings for downgrade initiated on 24 February 2016.

RATINGS RATIONALE

"The rating confirmation reflects Moody's expectation that Tingyi will deliver product upgrades and reposition its business to avoid a further material decline in revenue, manage its costs to moderate decline in EBITDA, and manage its working capital position and capital expenditures so as to lower its debt levels," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

Moody's expects Tingyi's revenue decline to narrow to 5% in 2016 from 11% in 2015. Moody's also says Tingyi should achieve positive revenue growth starting in 2017. Moody's expectations are based on the company's strengthening of its food safety procedures, product innovations and upgrades.

Moody's also expects that Tingyi will demonstrate a reduction in distribution costs, lower other operating expenses and improve asset utilization rates. These factors will slow any deterioration in the company's EBITDA. Moody's expects that Tingyi's EBITDA margin will register in excess of 11%-12% in 2016 and 2017 versus 13% in 2015.

The company will also sustain its good working capital management. Its finished goods and trade receivables turnover were at 10 days and 9 days in 2015. Such a fast turnover rate resulted in a strong positive operating cash flow of around RMB886 million.

Tingyi has also shown good discipline in capital expenditures. Its capital expenditures fell to USD 544 million in 2015 from USD1.3 billion in 2014. Moody's expects that the company will demonstrate a low level of capital expenditures of around USD300-USD500 million in 2016 and 2017.

The company's ability to maintain a low level of capital expenditures results in positive free cash flow, which in turn strengthens its capacity to pay down debt. Moody's estimates that the company will generate around USD100-USD300 million in free cash flow during 2016 and 2017.

The company has shown a track record of debt reduction. Its reported debt fell to around USD2.35 billion at end-March 2016 from USD2.45 billion at end-2015 and USD2.63 billion at end-2014.

While the company has taken measures to improve its financial profile, any improvement will be gradual, given the competitive market conditions in China and the slowdown in the country's economy.

Moody's expects that the company's adjusted debt/EBITDA will increase to around 2.6x in 2016. Such weakness is reflected in the negative outlook on its ratings.

Tingyi's Baa1 ratings are supported by its established brand name of "Master Kong" and its leading market positions in the instant noodles and several major soft drinks segments in China.

Tingyi has held its leading positions through maintaining good food safety standards and an extensive distribution network across China. At the same time, Tingyi's business growth is supported by stable food and beverage consumption trends.

The ratings also consider Tingyi's business model, which includes steady operating cash flow—despite some weakness in revenue over the last 12-18 months due to competition—and its sound management of working capital. Both factors are attributable to its superior market position, operating scale and prudent financial planning.

Tingyi has managed to generate profit margins comparable to most of its industry peers, given its economies of scale, and favorable trends in input prices over the last two years. The lower prices have helped Tingyi maintain its cost competitiveness.

However, the operating environment for the food and beverage industry is competitive. As a result, Tingyi's spending on marketing and distribution could stay high, as it introduces new products to enhance its market position in the near term.

Tingyi's liquidity position is solid. Moody's estimates that the company's operating cash flow totaled USD700-USD800 million for calendar 2016. This amount, together with its reported cash on hand of USD1 billion, is more than sufficient to cover its short-term debt of USD1.1 billion.

The negative outlook on the ratings reflects the fact that Tingyi will face some execution risk and will need time to bring down its debt leverage, against the backdrop of a competitive market and a slowing economy in China.

Upward ratings pressure is limited, given the negative outlook. The ratings outlook could return to stable if the company: (1) stabilizes and reduces the declines in its revenue and EBITDA margins; and (2) shows a debt/EBITDA below 2x.

However, downgrade pressure on the ratings could emerge if the company:

(1) Fails to stabilize its revenue, and EBITDA margins;

(2) Encounters material food safety problems which weaken consumer confidence in its products and its market share;

(3) Undertakes an aggressive dividend policy or acquisitions which weaken balance sheet liquidity, or there is evidence of cash leakage to its parent or related companies; and/or

(4) Shows weakening credit metrics, with adjusted debt/EBITDA in excess of 2.5x and negative free cash flow over a prolonged period.

The principal methodology used in these ratings was Global Packaged Goods published in June 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Listed on the Hong Kong Stock Exchange in 1996, Tingyi (Cayman Islands) Holding Corp. and its subsidiaries engage in the production and distribution of instant noodles (approximately 40% of revenue in 2015), soft beverages (58%), and instant foods (2%). Most of its products are sold under the "Master Kong" brand in China.

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.

Lina Choi
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
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 confirms Tingyi's Baa1 ratings; outlook negative
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