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.
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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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Hong Kong
China (Hong Kong S.A.R.)
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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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JOURNALISTS: 852 3758 1350
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