RPT-Fitch affirms China Lesso at 'BB'; outlook stable
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July 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed China Lesso Group Holdings Limited's (Lesso, formerly known as China Liansu Group Holdings Limited), Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB'. The Outlook is Stable. Lesso is a plastic pipes and fittings manufacturer.
Key Rating Drivers
Stable results performance: Lesso's revenue was up 7.4% at CNY10.9bn in 2012, slower than in previous years. This was mainly due to lower average selling prices (ASP) offsetting a 13% yoy increase in sales volume. Because its ASP is benchmarked against input (PVC etc) spot prices, changes to raw material costs are passed on to the final price of Lesso's products. As a result, the company is able to enjoy stable gross margins (2012: 24.3%; 2011: 24.2%) and EBITDAR margin (2012: 16.4%; 2011: 16.8%).
Lesso's stable sales are underpinned by its strong distribution network and brand name. In 2012, the company further expanded its nationwide network to include 1,300 independent distributors, compared with 1,200 in 2012. This allows Lesso to fend off competition from new entrants.
Strong cash generation: Operating cash flow (as defined by Fitch) remained stable at CNY1.4bn for 2012. Lesso reported a modest funds from operation (FFO) adjusted net of 0.26x at end-2012, compared with a net cash position at end-2011. However, leverage is low among 'BB' category credits.
Capex on track: Lesso's capex rose to CNY 1.5bn in 2012 from CNY1.2bn in 2011. This was mainly due to pre-spending on land acquired for new plants. Fitch expects annual capex during 2013-2015 to be close to CNY1bn per annum, excluding potential spending on new product acquisition above CNY100m each year. Lesso's new capacity expansions in Hainan and Northern China are in line with the company's nationwide expansion plan.
Product diversification insignificant: The company is seeking to add new offerings (plastic-steel doors & windows, kitchen and sanitary products etc) to its product portfolio to cross-sell to existing clients. However, these products may only account for around 3-5% of total revenue in 2013-2014 with limited impact on its near-term performance.
Treasury management neutral: During 2012, apart from repurchasing and cancelling USD9.8m of its outstanding bond, Lesso also purchased CNY280m worth of Reg S USD bonds (coupon rates at 9%-13.75%) maturing between November 2013 and April 2016. The company's intention is to narrow the gap between its assets and liabilities (USD senior unsecured notes due May 2016). It had CNY1.9bn cash at end-2012. Given the small scale of the bond purchase, Fitch views the associated credit risk as limited relative to Lesso's balance sheet.
Geographic concentration a constraint: Of Lesso's 2012 revenue 63% came from southern China, one of the most developed markets in the country. However, this geographic concentration presents business risk and is a constraint on Lesso's IDR.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Losing its dominant market position in southern China
-EBITDA margin falling below 10% on a sustained basis
-FFO adjusted net leverage rising above 2.0x on a sustained basis
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Achieving dominance in a major market outside southern China
-EBITDA margin remaining above 15% on a sustained basis
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