Hong Kong, December 11, 2017 -- Moody's Investors Service has downgraded to B3 from B2 the corporate family
rating (CFR) of Reward Science and Technology Industry Group Co.,
Ltd., as well as the rating on the 7.25% 3-year
senior unsecured notes issued by Reward International Investment Limited
and guaranteed by Reward.
The ratings outlook remains negative.
RATINGS RATIONALE
"The downgrade reflects our concerns about insufficiencies in the
company's internal controls and financial reporting standards,
which, in our view, may lead to greater difficulty in maintaining
access to the domestic bank and bond markets for funding, in light
of the notice issued by the China Securities Regulatory Commission,"
says Gloria Tsuen, a Moody's Vice President and Senior Analyst.
The CSRC published an announcement last week regarding Reward's
regulatory violations, including misappropriation of funds from
onshore bond proceeds, inadequacies on information disclosure,
and weak financial management and poor accounting quality.
According to CSRC, Reward has three months to carry out rectifications
and report to the CSRC, which will then decide if further measures
in relation to the company are necessary.
"Although the company has been increasing its communications with
investors, the violations indicate that much needs to be achieved
in strengthening its financial controls and corporate governance to regulatory
standards," adds Tsuen.
Reward has sufficient liquidity for the next 12 months. Based on
its regulatory filings, it had RMB5.5 billion in cash,
and RMB2.4 billion in short-term borrowings and notes payables,
as of the end of September 2017.
However, until the regulatory issues are resolved and internal controls
improved, Moody's believes that the company will likely face
increased difficulty in accessing the debt markets.
Reward's quarterly operating performance remains volatile,
although its adjusted debt/EBITDA declined to 5.4x for the 12 months
ending in September 2017, compared with 9.2x for the 12 months
ending in June 2017, and 6.1x as of the end of 2016.
Moody's expects leverage will remain in the 5.0x-6.0x
range and consistent with the single-B rating category.
Reward's CFR continues to be supported by its (1) sufficient liquidity,
(2) business model of a vertically integrated dairy supply chain,
which helps to ensure product safety, and (3) growing daily consumer
products business which reduces its reliance on the dairy segment.
At the same time, the rating reflects Reward's: (1)
high ownership concentration and weak internal controls; (2) small
size and limited market shares; and (3) execution risks related to
its growth-driven business plan, including cross-border
acquisitions.
The negative outlook reflects the uncertainties in its access to funding,
its weak corporate governance and the persistent high volatility in Reward's
operating performance.
There is no upward rating pressure, given the negative outlook.
However, the outlook could return to stable if Reward (1) addresses
its internal control issues properly; (2) reduces the volatility
in its operating performance; and (3) maintains adjusted debt/EBITDA
at below 5.5x in a consistent manner.
Downward rating pressure could emerge if: (1) Reward's operational
performance or liquidity weakens; (2) its leverage increases to above
6.0x; or (3) its corporate governance fails to improve.
The principal methodology used in these ratings was Global Packaged Goods
published in January 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Headquartered in Beijing, Reward Science and Technology Industry
Group Co., Ltd. engages in the production and marketing
of dairy and other food products, as well as daily consumer products
(mainly cleaning products), and other businesses, such as
the leasing of commercial property and hotels.
It generated RMB7.6 billion in revenue in 2016, with 60%
derived from dairy and other food products, 29% from daily
consumer products, and 11% from other businesses.
Reward is a private company 96%-owned by its founder and
chairman, Mr. Hu Keqin, and his family.
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.
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