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Rating Action:

Moody's downgrades Kangde Xin to B1; outlook stable

 The document has been translated in other languages

23 Aug 2018

Hong Kong, August 23, 2018 -- Moody's Investors Service has downgraded to B1 from Ba3 the corporate family rating of Kangde Xin Composite Material Group Co., Ltd. (KDX) and the backed senior unsecured bond rating of Top Wise Excellence Enterprise Co., Ltd.

The rating outlook is stable.

These actions conclude Moody's review for downgrade initiated on 11 June 2018.

RATINGS RATIONALE

"The downgrade reflects our concern that the continued trading suspension of KDX's shares will impede the company's ability to access the equity market for funding," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

"KDX is still growing and it is investing in new business segments such as polymer materials. As a result, maintaining good access to funding -- both equity and debt -- is important," adds Tsuen.

Trading in KDX's shares on the Shenzhen Stock Exchange has been suspended since June 6, when it announced that it was in the process of acquiring a domestic supplier for automobile service centers and that the transaction would involve a stock issuance.

The suspension followed another an earlier suspension from February 26 until April 27 that had resulted from the negotiations for the acquisition of an overseas company. The transaction is still in negotiation.

While the company's largest shareholder reduced its share pledge to 91.5% as of the end of July 2018 from close to 100% at the end of 2017, this ratio remains very high and increases the risk of a change of control as well as potential volatility in the trading of KDX's shares.

KDX reported solid financial results in 1H 2018, with revenue growing 20% year on year, and its adjusted EBITDA margin improving to 34% from 31% a year ago driven in part by increased operating efficiencies. Moody's expects the company's revenue growth and margins will remain steady in the next 12-18 months.

The company's adjusted debt/EBITDA was around 3.4x for the 12 months to the end of June 2018, and Moody's expects it will remain in the 3.2x-3.5x range in the next 12-18 months. Such leverage levels support the company's B1 rating.

KDX also remained in a net cash position, with RMB16.8 billion in cash and RMB14.3 billion in total reported debt as of the end of June 2018.

KDX's B1 rating continues to reflect the company's growth in the global optical film market, technological capabilities, vertically integrated business model, solid profitability, steady credit metrics and strong liquidity position.

At the same time, the rating also reflects KDX's modest size relative to global manufacturers, high working capital and capital spending requirements, execution risks, and potential impact on its business plans from prolonged trading suspensions.

The stable outlook on KDX's rating reflects Moody's expectation that the trading suspension will be lifted in the near term and that the share pledge of its largest shareholder will continue to decline, thus reducing the risk of a change in control. In addition, the stable outlook reflects Moody's expectation that KDX will maintain strong liquidity with a net cash position, and that its underlying operating performance will remain steady.

A failure to fulfill these expectations will pressure the company's rating.

There is no upgrade pressure in the near term, due to the prolonged share trading suspension. Upward pressure could emerge if KDX (1) demonstrates a track record of normal share trading and a reduced risk of a change of control, and (2) maintains its steady operating performance and solid credit and liquidity metrics.

The rating could be downgraded if (1) KDX fails to resume normal share trading in the near term, (2) its largest shareholder fails to reduce its share pledge or the risk of a change of control remains elevated, (3) KDX loses its net cash position or its liquidity weakens, or (4) its adjusted debt/EBITDA rises above 4.5x-5.0x.

The principal methodology used in this rating was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2001 and listed on the Shenzhen Stock Exchange since 2010, Kangde Xin Composite Material Group Co., Ltd. is a leading manufacturer of optical and pre-coated laminating films globally.

KDX was 24% owned by its parent company, Kangde Investment Group Co., Ltd., and 76% by public shareholders at the end of July 2018. The company's founder and chairman, Yu Zhong, owns 80% of Kangde Investment Group.

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

Gloria Tsuen, CFA
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

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

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