Rating Action: Moody's downgrades Yestar's ratings to B3; outlook remains negative
Global Credit Research - 12 Aug 2020
Hong Kong, August 12, 2020 -- Moody's Investors Service has downgraded the corporate family rating (CFR) and senior unsecured rating of Yestar Healthcare Holdings Company Limited to B3 from B1.
The outlook on the ratings remains negative.
On 10 August, Yestar announced it has entered into a share transfer agreement to acquire the remaining 30% equity interest in five subsidiaries, collectively known as the Shanghai Anbaida Group Companies (Anbaida), from minority shareholders. The proposed transaction will take place in three phases and be completed by 31 August 2021 at a consideration of RMB675 million.
In addition, Anbaida will distribute accumulated undistributed profits from 1 January 2015 to 30 June 2021 within a five-year period starting in 2021. The amount of undistributed profits that was accumulated during 1 January 2015 to 31 December 2019 that was attributable to Anbaida's minority shareholders was RMB253 million.
The transaction is subject to a number of conditions precedent, including relevant approvals and consents.
"The downgrade to B3 and negative outlook reflect Yestar's increased liquidity risk, with the RMB675 million consideration payable in three installments through 31 August 2021 and a USD200 million bond due 15 September 2021," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"The rating action also factors in the challenges Yestar faces in meeting its working capital needs as the company grows its revenues and expands its in-vitro diagnostic (IVD) business over the next 12 months," adds Ho, who is also Moody's Lead Analyst for Yestar.
Yestar's B3 corporate family rating is constrained by its modest size, high supplier concentration and high repayment and working capital needs over the next 12 months. This partially offsets its solid position in the distribution of medical consumable products in China and strong and sustained partnership with leading global companies, including Roche Holding AG (Aa3 positive) and FUJIFILM Holdings Corporation (A2 stable).
Yestar's liquidity is weak. With the RMB675 million consideration and USD200 million bond due September 2021, Moody's expects Yestar's 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.
Moody's expects Yestar's working capital needs will rise with the growth of its IVD distribution and service provision business, given the longer payment terms associated with this business, with accounts receivable days increasing to 109 in 2019 from 73 in 2016. The company's medical business, which includes the higher-margin IVD business, accounted for 90% of total revenue in 2019.
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 payments associated with its previous acquisitions.
The company has also demonstrated a track record of access to diversified funding channels, including bank facilities, USD bonds and public equity financing, as evidenced by its issuance of new shares to FUJIFILM in December 2018.
Nevertheless, an inability to meet the scheduled acquisition-related payments, a further weakening in its liquidity position or an inability to prefund meaningfully ahead of its USD bond maturity will pressure its rating.
Moody's expects Yestar's revenue to grow about 6% over the next 12-18 months from the level in 2019. The rise reflects the continued growth in demand for medical consumable products in China supported by the company's increased market share and growing geographical coverage, and partially offsetting weakening demand in its non-medical businesses.
Moody's expects Yestar's leverage will rise to about 2.6x over the next 12-18 months from 2.1x in 2019 on lower EBITDA resulting from margin contraction, as well as a rise in debt level to fund its business growth and acquisition-related payments.
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 acquisitive growth strategy.
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 materially 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 cash to short-term debt rising above 2.0x over the next 12-18 months.
Moody's could downgrade the rating if (1) Yestar fails to improve its liquidity position, and in particular if it fails to meet the scheduled RMB675 million consideration payments and makes insufficient progress in prefunding 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) its corporate governance weakens.
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.
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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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
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