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Rating Action:

Moody's downgrades Meinian Onehealth Healthcare to B1; outlook remains negative

 The document has been translated in other languages

14 Sep 2020

Hong Kong, September 14, 2020 -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Meinian Onehealth Healthcare Holdings Co., Ltd. to B1 from Ba3. At the same time, Moody's has downgraded the senior unsecured rating on the bonds issued by Mei Nian Investment Limited and guaranteed by Meinian Onehealth to B1 from Ba3.

The outlook remains negative.

"The downgrade reflects our view that Meinian Onehealth's strategy to shift to a premium service offering has been more challenging than previously expected and that its leverage will remain elevated over the next 12-18 months, amid a significant deterioration in revenue and earnings during the first half of 2020," says Shawn Xiong, a Moody's Assistant Vice President and Analyst.

The B1 rating also factors in the operational benefits and support from Alibaba affiliates as the company's second largest shareholder group.

The negative outlook reflects uncertainty around the pace of recovery of the company's operating performance, its weak liquidity position, and its large upcoming debt maturities over the next 12 months.

RATINGS RATIONALE

Meinian Onehealth's B1 CFR reflects the company's leading position in China's (A1 stable) private medical examination sector, its exposure to the country's growing preventive healthcare industry, and the operational benefits and support from having Alibaba (China) Technology Co and its affiliates as the second largest shareholder group, with a 14.39% stake as at 30 June 2020.

Alibaba (China) Technology Co, an indirect and wholly owned subsidiary of Alibaba Group Holding Limited (A1 stable) and its affiliates, paid a total consideration of around RMB6.70 billion for its stake in the fourth quarter of 2019.

On the other hand, the rating is constrained by the integration and execution risks stemming from (1) its strategy of growing through acquisitions and multistep investments, (2) its shift towards a more premium service offering, and (3) the evolving regulatory environment.

The coronavirus outbreak has resulted in a significant decline in Meinian Onehealth's revenue and earnings in the first half of 2020. It has led to the temporary closure of its medical centers. Additionally, private medical check-ups have also remained a more discretionary spending, particularly for individuals.

Although Moody's expects the company's operating performance to start gradually recovering from the second half of 2020, this will only partly offset the material decline in the first half of the year. As a result, Moody's expects Meinian Onehealth's revenue will decline by 25%-30% in 2020.

For 2021, Moody's expects the company's revenue to recover to 2019 levels. At the same time, the company's adjusted EBITDA margin will likely recover to around 18%-19% as it continues to generate the majority of its revenues from corporate customers over the next 12-18 months.

As a result, Moody's expects the company's leverage will increase significantly in 2020 due to the expected very weak earnings generation. Moody's expects the company's leverage to improve to around 4.8x in 2021 as its operating performance recovers.

From an operational perspective, the company has received increased operational support from and collaboration with Alibaba and its affiliates during the first half of 2020, including in areas such as the development of mobile and online applications, the upgrade of information, sales and finance systems, enhancement of its data security system, and the building of medical data centers. Moody's expects the company to benefit from these initiatives over the medium term.

Meinian Onehealth's liquidity is weak mainly because of weak operating cashflow and some sizable maturities through the next 12 months. Moody's expects that the company's cash balance of around RMB2.5 billion at the end of June 2020, combined with its expected operating cash flow of RMB850 million-RMB900 million, will be insufficient to cover its short-term debt of RMB4.6 billion including its USD200 million senior unsecured notes due in Aril 2021, and capital expenditure of around RMB1.2 billion, over the next 12 months.

The associated risks are mitigated by Meinian Onehealth's access to diversified funding sources, including bank borrowings, equity markets, and the onshore and offshore bond markets.

Meinian Onehealth's ratings also consider the following environmental, social and governance (ESG) factors.

Firstly, Meinian Onehealth operates in the highly regulated healthcare services industry. A failure to comply with relevant regulations, or changes in government policies or regulations, could have an adverse impact on its operations.

Secondly, Meinian Onehealth's ownership is concentrated in a small number of shareholders, who have pledged a high ratio of their shares. However, share pledge has been decreasing in recent periods.

The largest shareholder group is Mr. Yu Rong whom together with his affiliates, have a 17.22% stake in the company, followed by Alibaba (China) Technology Co. and its affiliates' 14.39% stake.

This situation is partially mitigated by Meinian Onehealth's status as a listed and regulated entity.

The company's eleven-member board consists of four independent directors. Additionally, three members are appointed from Alibaba Group and its subsidiaries.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could change the ratings outlook back to stable if (1) the company's operations and revenue recover on a sustained basis over the next 6-12 months; and (2) it successfully refinances its upcoming bank loans and USD200 million senior unsecured notes.

Moody's could downgrade the ratings if (1) the company's revenue and profitability fail to improve meaningfully on a sustained basis, such that its adjusted debt/EBITDA exceeds 5.0x on a sustained basis; (2) unexpected future disruptions in its operations lead to a further significant weakening of its liquidity position; or (3) it fails to refinance its upcoming bank loans or refinance its USD200 million senior unsecured notes in a timely basis.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Shanghai, Meinian Onehealth Healthcare Holdings Co., Ltd. is a leading Chinese preventive healthcare solutions provider offering medical examinations and various other services. The company was listed on the Shenzhen Stock Exchange in 2015.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Shawn Xiong
Asst Vice President - 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

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

No Related Data.
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