Hong Kong, May 28, 2021 -- Moody's Investors Service has upgraded the corporate family rating
(CFR) of Yingde Gases Group Company Limited (Yingde Gases) to Ba2 from
Ba3.
At the same time, Moody's has upgraded the senior unsecured rating
on the bonds issued by Yingde Gases Investment Limited and guaranteed
by Yingde Gases to Ba2 from B1.
The outlook remains stable.
"The rating upgrade reflects Yingde Gases' improving operating
scale, client diversification, proven business resilience
and longer track record of prudent financial management with low leverage
since PAG Asia II LP took ownership of the company in 2017,"
says Roy Zhang, a Moody's Vice President and Senior Analyst.
"The upgrade of the senior unsecured rating also reflects declining
priority claim at operating subsidiaries' level and better diversification
of Yingde Gases' business profile, which mitigate structural
subordination risk," adds Zhang.
RATINGS RATIONALE
Yingde Gases Ba2 CFR reflects the company's strong position in China's
(A1 stable) on-site gas supply market, where it holds competitive
advantages, and good profitability and recurring cash flow,
supported by its long-term contracts with on-site customers.
Such contracts accounted for about 67% of its revenue in 2020.
At the same time, Yingde Gases' CFR is constrained by the company's
relatively limited diversification in terms of market coverage and client
industry exposure. In addition, its status as a private company
with 100% ownership by private equity owners means that it is not
subject to the same financial disclosure obligations and regulatory supervision
as listed companies.
Since its parent, PAG Asia II LP, took ownership of the company
in 2017, Yingde Gases has managed to generate positive free cash
flow while maintaining its leverage, as measured by total adjusted
debt to EBITDA, at below 2.5x, which is strong for
its rating category. This track record has proven the company's
business resilience and prudent financial management, particularly
during the tough operating environment in 2020 amid the coronavirus pandemic.
In addition, Yingde Gases has grown its operating scale over the
years while improving its client diversification and reducing its exposure
to the steel industry. Its revenue increased to RMB16.1
billion in 2020 from RMB6.9 billion in 2013, while its gas
production facilities in operation increased to 100 from 57 over the same
period.
Yingde Gases' liquidity is good. The company had cash and
cash-like sources of about RMB2.7 billion as of the end
2020. This, together with its strong operating cash flow,
is sufficient to cover the company's short-term debt of about
RMB1.6 billion and other financial obligations in the next 12-18
months.
The senior unsecured bond rating is unaffected by subordination to claims
at the operating company level, based on Moody's expectation that
the majority of claims will remain at the holding company level.
Yingde Gases' creditors also benefit from the group's highly diversified
business profile — with cash flow generation across a large number
of operating subsidiaries — which mitigates structural subordination
risk.
Yingde Gases' rating also considers the following environmental,
social and governance (ESG) factors.
Industrial gas firms have lower direct environmental risks related to
manufacturing processes as compared with other specialty chemical companies.
However, they supply customers that have high risks, including
steel makers and chemical producers, and in some cases, are
directly integrated into their clients' facilities.
The rating also considers Yingde Gases' private company status and concentrated
ownership, with PAG Asia II LP owning a 100% stake.
As a private company, Yingde Gases is not subject to the same strict
disclosure requirements as listed companies. Nevertheless,
based on the company's track record, Moody's expects
it to manage its financial profile prudently.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects Moody's expectation that Yingde
Gases will grow its revenue and maintain its profitability and positive
free cash flow generation, as well as maintain its prudent financial
management, with disciplined capital spending, acquisitions
and shareholder distributions. At the same time, Moody's
expects the company to maintain its strong liquidity profile.
An upgrade of the ratings is unlikely in the near term, given Yingde
Gases' private company status and its 100% ownership by private
equity firms. Upward rating pressure could emerge if the company's
shareholding structure changes, including but not limited to a public
listing, resulting in better public disclosure and commitment on
financial policy regarding its capital structure, liquidity,
acquisition and shareholder distribution.
Moody's could downgrade the ratings if (1) the company's revenue
or profitability declines; or (2) its liquidity or credit profile
deteriorates, such that its adjusted debt/EBITDA exceeds 3.0x-3.5x
on a sustained basis; or (3) it demonstrates poor information disclosure
or an aggressive financial policy.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Yingde Gases Group Company Limited is one of the largest companies in
the independent on-site industrial gas market in China.
As of December 2020, the company had 100 gas production facilities
in operation and another 21 under development. PAG Asia II LP,
an investment partnership managed by a private equity firm, held
a 100% stake in Yingde Gases as of December 2020.
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Roy Zhang
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
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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
