Hong Kong, May 09, 2017 -- Moody's Investors Service has changed Reward Science and Technology Industry
Group Co., Ltd. (Reward)'s rating outlook to
negative from stable, and has affirmed Reward's B1 corporate
family rating.
At the same time, Moody's has assigned a definitive B1 rating
to the USD200 million, 7.25%, 3-year
senior unsecured notes, due 25 January 2020, issued by Reward
International Investment Limited and guaranteed by Reward. The
provisional rating was assigned on 12 January 2017.
The ratings outlook is negative.
RATINGS RATIONALE
"The change in ratings outlook to negative reflects the higher-than-expected
volatility in Reward's operating performance, which raises
uncertainty over the company's ability to manage down its debt leverage
to a level appropriate for its B1 corporate family rating,"
says Gloria Tsuen, a Moody's Vice President and Senior Analyst.
Reward's quarterly revenue and margins reported in its 2016 and
1Q 2017 financial results show significant variation.
Reward's revenue increased 36% year-on-year to RMB7.5
billion in 2016, driven by growth in its dairy and daily consumer
products segments. However, its reported operating margins
declined 4.6 percentage points to 11.6%, due
in part to the costs of advertising and business expansion, and
also more upfront booking of selling-related expenses.
As a result, Reward's adjusted debt/EBITDA reached around
6.1x at end-2016, which was above Moody's expectation.
A continuation of its high earnings volatility will challenge Reward's
de-levering to below 4.5x by the end of this year.
Reward's revenue in 4Q 2016 rose 61% year-on-year,
following a 38% year-on-year decline in 3Q 2016.
At the same time, its reported operating margins fell to negative
4.1% in 4Q 2016, from 25.3% in 3Q 2016
and 16.5% in 1H 2016. And in 1Q 2017, its revenue
declined 8% year-on-year while its reported operating
margins improved to 17.3%.
This volatility in its quarterly performance reflects factors such as
the timing of sales, inventory levels at wholesalers and supermarkets/hypermarkets,
new product launches, advertising and promotion campaigns,
and commodity milk prices. Reward's relatively small size
and limited market shares in cleaning products and consumer milk powder
also limit its buffer against changes in the markets and competitive behavior.
Moody's continues to note the execution risks and investment needs
from Reward's growth-driven business plan.
The company has been expanding its business into new segments such as
milk formula, while also introducing new products in both of its
dairy and daily consumer product segments.
In addition, it is acquiring US-based Panrosa Enterprises,
Inc. (unrated) to expand overseas and entering the personal care
and mid- to high-end daily consumer product markets.
The transaction will close mid-2017.
Reward's reported debt totaled RMB6.9 billion at end-2016,
before the issuance of the USD200 million notes in January 2017.
At the same time, the company's liquidity remains adequate,
as its high cash balance of RMB6.6 billion at end-March
2017 was more than enough to cover its RMB1.9 billion in short-term
debt and bills payable.
However, the rating could come under pressure if the company is
unable to generate profitable growth or if it fails to reduce its debt.
As such, Moody's will be closely monitoring the company's
quarterly performance.
Reward's B1 CFR is supported by (1) its vertically integrated dairy
supply chain, which helps to ensure product safety; (2) the
increasing level of national penetration of its cleaning products;
and (3) its steady operating cash flow generation and reduced reliance
on short-term debt.
At the same time, the rating is constrained by the company's:
(1) small size and limited share in cleaning products in China; (2)
new entry into the highly competitive and highly regulated infant milk
formula market; (3) execution risks from a growth-driven business
plan; and (4) high ownership concentration.
The definitive rating assignment on the USD notes follows the completion
of the issuance, the final terms and conditions of which are consistent
with Moody's expectations, and the registration of Reward's guarantee
on the issued bonds with China's State Administration of Foreign Exchange.
There is no upward ratings pressure, given the negative outlook.
However, the outlook could return to stable if Reward: (1)
reduces the volatility in its operating performance, and (2) reduces
adjusted debt/EBITDA to below 4.5x in the next 12 months.
Downward rating pressure could emerge if: (1) Reward's operational
performance or liquidity weakens; (2) the company fails to reduce
leverage; or (3) it fails to maintain sound corporate governance.
Credit metrics indicative of downgrade pressure include an adjusted EBIT
margin below 10% or adjusted debt/EBITDA above 4.5x on a
sustained basis.
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,
and other businesses, such as the leasing of commercial property
and hotels. It generated RMB7.6 billion in revenue in 2016.
It 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
