Hong Kong, December 18, 2018 -- Moody's Investors Service has downgraded to B3 from B1 the corporate
family rating of Kangde Xin Composite Material Group Co.,
Ltd. (KDX) and backed senior unsecured bond rating of Top Wise
Excellence Enterprise Co., Ltd.
The rating outlook is negative.
These actions conclude Moody's review for downgrade initiated on
2 November 2018.
RATINGS RATIONALE
"The downgrade reflects our concern that the deteriorating liquidity
profile of KDX's largest shareholder and the continued elevated
share pledge ratio by the same shareholder increases the risks of refinancing
and change of control at KDX," says Gloria Tsuen, a
Moody's Vice President and Senior Credit Officer.
Repeated disclosure issues raised by regulators relating to the largest
shareholder also reflect potential inadequacies in the company's
corporate governance that may hurt KDX's ability to maintain funding
access.
"As the operating environment becomes more challenging, a
weakening in KDX's ability to refinance will further reduce its
net cash position, increase liquidity risks and may impact its business
operations," adds Tsuen
KDX's largest shareholder, Kangde Investment Group Co.,
Ltd., had pledged around 93% of its KDX shares as
of 5 November 2018.
As announced publicly, due to its high leverage and weak liquidity,
it is now in discussions with Zhangjiagang City Investment and Development
Group Co., Ltd. and Soochow Securities Co.,
Ltd. for liquidity support.
However, the amount potentially provided by the two new strategic
partners will only cover a portion of Kangde Investment's share
pledge value, and the risk of a change of control -- which
will accelerate debt repayments and impact KDX's operations --
remains high.
Moody's is also concerned about KDX's information disclosures
in its dealings involving Kangde Investments. The China Securities
Regulatory Commission (CSRC) is continuing its investigation, initiated
since October, into potential information disclosure violations
by KDX and its two largest shareholders.
In addition, on 22 November 2018, the Shenzhen Stock Exchange
publicly criticized KDX for failing to disclose that, in its carbon
fiber joint venture involving Kangde Investment, whereas KDX had
injected cash equity, Kangde Investment was allowed to inject assets
instead of cash.
KDX's 3Q 2018 financial statements showed a weakening operating
performance as increasing economic uncertainties dampened sales to downstream
customers. Its net cash position also narrowed to RMB2.5
billion at the end of September 2018 from RMB4.4 billion at the
end of 2017, as the company increased its capital spending.
KDX's B3 rating mainly reflects the drag by its largest shareholder on
its standalone steady credit profile. Such a drag largely offsets
KDX's technological capabilities and strengths from its integrated
business model in its optical film operations.
The negative outlook on KDX's rating reflects Moody's expectation
that the weakening operating environment and shareholder drag could together
affect KDX's funding access and weaken the company's financial
profile.
The rating outlook could be revised to stable if (1) its largest shareholder's
financial position meaningfully improves; (2) the share pledge ratio
of the same shareholder declines significantly in a sustained manner;
and (3) CSRC investigation is closed with no negative findings or development.
The rating could be downgraded if (1) its largest shareholder fails to
improve its financial position and reduce its share pledge; and hence
the change of control risk remains elevated; (2) KDX's liquidity
weakens, or (3) upon a prolonged CSRC investigation or if the investigation
is completed with negative findings.
The principal methodology used in these ratings 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 September 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. lease 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
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
Clement Cheuk Yiu 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
