Tingyi (Cayman Islands) Holding Corp. -- Moody's revises Tingyi's rating outlook to positive
Rating Action: Moody's revises Tingyi's rating outlook to positive
Global Credit Research - 10 Jul 2020
Hong Kong, July 10, 2020 -- Moody's Investors Service has affirmed Tingyi (Cayman Islands) Holding Corp.'s (Tingyi) Baa1 issuer rating, and has revised the rating outlook to positive from stable.
RATINGS RATIONALE
"The positive outlook reflects Tingyi's prudent financial policy, which has helped it achieve a robust financial profile featuring low leverage, strong liquidity and net cash position, despite the currently challenging operating conditions. We expect Tingyi will maintain its strong financial profile over the next 2-3 years," says Ying Wang, a Moody's Vice President and Senior Analyst.
Tingyi's leverage improved to 1.6x at the end of 2019 from 2.0x at the end of 2017. Moody's expects the company will continue to deleverage to 1.3x-1.5x over the next 1-2 years. The company's low leverage, coupled with its solid net cash position and strong liquidity, position Tingyi at the strong end of the Baa1 rating category.
Tingyi's improving debt leverage is attributable to its stable cash flow generation and a decrease in debt on the back of its prudent financial management. Tingyi's total adjusted debt fell to RMB13.0 billion at 31 December 2019 from RMB15.7 billion in 2017. The company's adjusted EBITDA remained stable around RMB7.7-8.3 billion over the same period.
Tingyi has a track record of maintaining a stable financial profile despite market volatility. It generated positive free cash flow in the range of RMB3.8-5.2 billion from 2017 to 2019, and has consistently increased its net cash position since 2018. Moody's expects the company's net cash balance to increase further to RMB6.3 billion in 2021 from RMB4.4 billion at 31 December 2019.
"The rating affirmation reflects our expectation that Tingyi will maintain its steady operating and financial performance, despite the impact of the coronavirus outbreak and slowing economic growth," adds Wang.
Tingyi's well-established "Master Kong" brand, the strong market positions of its core business segments and extensive distribution network will help support a strong financial profile.
Tingyi recorded 5% annual revenue growth in its noodle products along with steady sales for its beverage products, with 43.3% and 45.7% market share in instant noodles and ready-to-drink tea in 2019, respectively. Such a strong market position, underpinned by its extensive distribution network, has helped Tingyi weather the negative impact of the coronavirus outbreak.
While weakened consumer demand, temporary shutdowns of manufacturing facilities and distribution channels have negatively impacted its operating performance in the first few months of 2020, Moody's expect Tingyi's revenue will stabilize and grow moderately in the coming 12-18 months. The company's various manufacturing facilities and sales branches have gradually resumed operation in the second quarter of 2020, after the Chinese government eased travel restrictions and encouraged domestic consumption.
Moody's expects Tingyi's adjusted EBITDA margin to slightly decline 40 to 50 basis points in 2020, down from 12.8% a year earlier, but should recover to 2019 levels over the next 1-2 years as consumer sentiment gradually improves.
Tingyi's liquidity position remains robust, as evidenced by its solid net cash position of RMB4.4 billion in December 2019.
Moody's expects Tingyi to generate positive free cash flow over the next 12 months. Its operating cash flow of around RMB5.8 billion is sufficient to cover its capital expenditure of around RMB2.1 billion and dividend payouts of around RMB3.3 billion.
Tingyi's Baa1 issuer rating reflects the company's (1) established market leadership in its key product segments, with high brand recognition; (2) extensive distribution network, which enhances market penetration and increases barriers to competition; and (3) cash generation, backed by sound working capital management.
The rating also considers the non-cyclical character of Tingyi's principal product -- instant noodles, which contribute to steady revenue -- and its sound management of working capital leading to stable operating cash flow.
However, the rating is constrained by the challenges that Tingyi faces, including (1) the increasing need to develop new products and refine market segmentation; and (2) competition in the food and beverage industry because of the need to accommodate changing customer preferences in favor of healthy and value-for-money options, and to upgrade existing products, with offerings catering to different consumer tastes and preferences.
The rating 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. While Tingyi's operating performance has been negatively impacted in the last few months, its strong financial profile and prudent financial policy have provided a buffer against these volatilities.
Food safety is also a key consideration in assessing Tingyi's credit profile. Tingyi has managed to maintain its leading market position with a good food safety track record.
From a governance risk perspective, Tingyi's ownership is concentrated in Ting Hsin and the Wei family, who owned 33.9% of the company as of 1 April 2020.
The concentration risk is partially mitigated by (1) Tingyi's track record of upholding a prudent financial policy and maintaining a strong financial profile that provides ample buffer during periods of market volatility, (2) the presence of another key shareholder, Sanyo Foods Co., Ltd, which is a Japanese instant noodle producer established since 1953, and the presence of three independent nonexecutive directors on its nine-member board, and the presence of only independent directors on its audit committee, and (3) its long track record as a listed and regulated entity in Hong Kong Stock Exchange.
Moreover, Tingyi has prudently managed its acquisition and growth strategies, achieving financial metrics at levels strong for its current rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Tingyi's rating could be upgraded if the company (1) demonstrates a sustained stable EBITDA margin and stable revenue growth; (2) maintains strong liquidity, with a net cash position; and (3) records low debt leverage, with debt/EBITDA below 1.5x; all on a sustained basis.
On the other hand, the rating outlook could return to stable if the company (1) records a significant decline in its revenue and EBITDA margin; (2) encounters significant food safety problems that weaken consumer confidence in its products and hurt its market share; (3) adopts an aggressive dividend policy or undertakes acquisitions, weakening its balance-sheet liquidity, or if there is evidence of a cash leakage to its parent or related companies; or (4) records weakening credit metrics, with adjusted debt/EBITDA above 2.5x over a prolonged period.
The principal methodology used in this rating was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Listed on the Hong Kong Stock Exchange in 1996, Tingyi (Cayman Islands) Holding Corp. and its subsidiaries engage in the production and distribution of instant noodles, soft beverages, and instant foods. Most of its products are sold under the "Master Kong" brand in China.
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.
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This rating is 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.
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.
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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.
Ying Wang 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 Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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