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Rating Action:

Moody's downgrades Yestar's ratings to B1; outlook remains negative

 The document has been translated in other languages

08 Apr 2020

Hong Kong, April 08, 2020 -- Moody's Investors Service has downgraded the corporate family rating (CFR) and senior unsecured rating of Yestar Healthcare Holdings Company Limited to B1 from Ba3.

The outlook on the ratings remains negative.

RATINGS RATIONALE

"The downgrade and negative outlook reflect our expectation that Yestar's liquidity and operating performance will weaken over the next 12-18 months, leaving it vulnerable to operating environment fluctuations amid its higher funding needs, and positioning it in the B rating category," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.

"We expect its liquidity headroom to narrow due its rising working capital needs, outstanding payments associated with previous acquisitions, and USD200 million bond due in September 2021," adds Ho, who is also Moody's Lead Analyst for Yestar.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

More specifically, Yestar's weakening profitability, modest revenue scale and high funding needs over the next 12 to 18 months have left it vulnerable to shifts in market sentiment, given its sensitivity to consumer demand.

Moody's expects Yestar's working capital needs will rise with the growth of its In Vitro Diagnostic (IVD) distribution and service provision business, given the longer payment terms associated with this business. The company's medical business, which includes the higher-margin IVD business, grew 14% to RMB4.4 billion in 2019 when compared to 2018, accounting for 90% of the company's total revenues. As a result of its growing IVD business, the company's accounts receivable days increased to 109 in 2019 from 73 in 2016.

The risk associated with longer receivable days is partially mitigated by the company's strong credit controls, high exposure to hospitals and clinics in developed first-tier cities and provinces, and geographically diverse customer base. The ratio of impaired accounts receivable has been low, averaging around 1.3% over 2017 to 2019.

At the same time, Moody's expects Yestar's short-term debt will rise to fund the company's payments associated with its previous acquisitions. As of 31 December 2019, Yestar's current liabilities included amounts payable to non-controlling shareholders of its acquired subsidiaries, who have the option to sell their remaining interests to Yestar. The amounts payable reached RMB1.4 billion.

Moody's notes that as announced on 15 August 2019, Yestar has no definitive legally binding agreement or contract detailing the terms and conditions of the proposed acquisition for the remaining interests, and that the proposed acquisition is subject to further negotiation.

On 27 March 2020, Yestar announced that it would acquire a 20% equity stake in Guangzhou Hongen Medical Diagnostic Technologies Company Limited, and that its previous obligation to acquire a 30% equity stake in Hongen had been released. Yestar will pay for its acquisition of Hongen by transferring the tissue diagnostic business of its Roche Diagnostic Products distribution operations in Guangdong, which is valued at RMB77 million. The transaction is expected to close by the end of 2020. Moody's does not expect this transfer to significantly affect Yestar's revenues.

However, the company's plans for settling the remaining outstanding payables remain uncertain. As such, Moody's assumes that Yestar will start gradually paying down its payments to non-controlling shareholders of its acquired subsidiaries over time, using internal resources and short-term bank borrowings.

Yestar's liquidity is weak. Specifically, Moody's expects its cash to short-term debt, including restricted cash and current lease liabilities, will decline below 100% at the end of 2020 from 172% at the end of 2019.

The company's restricted and unrestricted cash of RMB665 million at 31 December 2019 and operating cashflow over the next 12 months will be sufficient to cover its short-term debt, estimated payments associated with its acquisitions, and investment needs over the next 12 months.

However, Moody's expects Yestar's liquidity headroom will narrow significantly over the next 12 months on the back of its USD200 million bond due on 15 September 2021.

Nonetheless, the company has demonstrated a track record of access to diversified funding channels, including USD bonds and public equity financing, as evidenced by its issuance of new shares to FUJIFILM Holdings Corporation (A2 stable) in December 2018, and also as evidenced by its repayment flexibility in its acquisition-related payments.

Nevertheless, any further weakening in its liquidity position or inability to prefund meaningfully ahead of its USD bond maturity will pressure its rating.

Yestar's B1 corporate family rating reflects the company's solid position in the distribution of medical consumable products in China and strong and sustainable partnership with leading global companies including Roche Holding AG (Aa3 positive) and FUJIFILM Holdings Corporation (A2 stable).

Although Yestar's partnership with Roche only began in 2014, the company has demonstrated its ability to cultivate strategic long-term supplier relationships, such as its relationship with FUJIFILM since 2001. FUJIFIM held a 9.7% stake in Yestar as of 30 June 2019.

Yestar's revenue grew 10% to RMB4.9 billion in 2019 when compared to 2018, driven by growth in its medical business, which was supported by an increase in market share in lower tier hospitals in its existing network and an expansion in geographical coverage.

At the end of 2019, Yestar had a medical consumable distribution network covering four first-tier cities and eight provinces in China, up from four first-tier cities and seven provinces at the end of 2018.

Moody's expects Yestar's revenue to grow modestly at 2% over the next 12 months. The rise reflects the continued growth in demand for medical consumable products in China, which partially offsets the adverse impact of the coronavirus outbreak on patient traffic at hospitals, in particular in the first quarter of 2020, and the weakening demand in non-medical business.

Yestar's leverage, as measured by adjusted debt/EBITDA, was stable at about 2.1x in 2019 compared with 2.1x in 2018, as its EBITDA rose in line with adjusted debt, which reached about RMB1.9 billion at the end of 2019.

Moody's expects Yestar's leverage will rise to about 2.6x in the next 12-18 months, which reflects Moody's expectation for lower EBITDA resulting from slower revenue growth and margin contraction, as well as a rise in debt level to fund its business growth and payments associated with its acquisitions.

At the same time, Yestar's rating is constrained by its modest size, high supplier concentration and sizeable funding needs associated with its acquisitions.

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

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Yestar of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

From a governance perspective, Yestar's ownership is concentrated in a small number of shareholders, including its chairman and CEO who had also pledged a portion of his shares. Management had also adopted an acquisition-driven growth strategy. This situation is partially mitigated by Yestar's status as a listed and regulated entity and track record of maintaining sound corporate governance.

Yestar's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because creditors at the holding company benefit from cash flow generation across a number of operating subsidiaries, mitigating structural subordination risk.

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

The ratings outlook could return to stable if (1) Yestar improves its liquidity over the next 12-18 months, (2) it stabilizes its working capital cycle as it pursues business growth, and (3) it uses long-term -- rather than short-term -- funding to address its financing needs.

Financial metrics that Moody's would consider for a change in the outlook to stable include Yestar's cash to short-term debt reaching above 2.0x over the next 12-18 months.

Downward ratings pressure could emerge if (1) Yestar fails to improve its liquidity position, in particular with respect to making progress on pre-funding its upcoming USD200 million bond due in September 2021; (2) its operating performance deteriorates; (3) it pursues a more aggressive financial management policy, or (4) it fails to maintain sound corporate governance.

Credit metrics indicative of downward rating pressure include Yestar's adjusted debt/EBITDA rising above 3.5x or cash to short-term falling debt below 1x on a sustained basis.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Shanghai and listed on the Hong Kong Stock Exchange since October 2013, Yestar Healthcare Holdings Company Limited is one of the largest distributors of Roche Holding AG's (Aa3 positive) diagnostics products in China and is also a leading distributor of FUJIFILM Holdings Corporation's (A2 stable) film products in the country.

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 entity is participating and the rated entity or its agent(s) generally provides 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 outcome 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.

Gerwin Ho
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

No Related Data.
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