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
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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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
