RPT-Fitch downgrades China's Fufeng to 'BB-'; outlook stable
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Aug 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded China-based food and beverage company Fufeng Group Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured debt to 'BB-' from 'BB'. The Outlook for the IDR is Stable.
The downgrade reflects Fufeng's delay in deleveraging as a result of weaker profitability in its monosodium glutamate (MSG) operations and further capex plans. The Stable Outlook reflects Fufeng's strong market position and moderate liquidity profile.
KEY RATING DRIVERS
MSG margins lower: Gross profit margin for Fufeng's MSG operations dipped further to 9.8% in H113 from 11.4% in 2012, due to ongoing oversupply and price competition. Collaboration among key domestic MSG players, including Fufeng, to cut production by 30% since June 2013 lifted prices to CNY6,300/tonne in July 2013 from CNY6,131/tonne in Q213. Fitch views MSG gross profit margins would stabilise in the low teens for the medium term, provided there are continued collective efforts from key producers to adjust output accordingly. This would still be much lower than in the past when margins were well above the mid-teens.
Capex delays deleveraging: LTM funds from operations (FFO)-adjusted net leverage, though down from its peak of 3.72x in 2012, remained high at around 2.7x. The company has no plans for further investment in MSG given current weak conditions but will opportunistically increase its capacity for xanthan gum as market conditions are still favourable, leaving minimal free cash flow for the next 24 months. Fitch views FFO-adjusted net leverage would be around 2.5x over the medium term, rather than significantly below this level as previously expected.
Xanthan gum's profitability to normalise: Benefitting from sales volume growth and tight supply, gross profit margin for Fufeng's xanthan gum jumped to 59% in H113 from 46% in 2012. Fitch expects xanthan gum's profit margin to normalise to around 40% in 2014 with prices retracing from their peak of CNY26,000/tonne in H113 (2012: CNY20,400/tonne) as new supply comes onto the market. With MSG prices stabilising at a lower level and profitability from xanthan gum likely to retrace from its peak, Fitch expects Fufeng's overall EBITDA margin to stabilise below 15% over the medium term (H113:12.6%)
Strong market position: Fufeng's integrated facilities and close proximity to raw materials (corn kernel and coal) provide it with cost advantages. The company benefits from economies of scale from its large capacity; it is the largest MSG and xanthan gum producer in the world by capacity. Its low-cost structure enables it to absorb lower selling prices as the market consolidates. No immediate liquidity risks: Fufeng's unrestricted cash of CNY863m, plus CNY1.5bn of unutilised bank facilities and undrawn medium-term notes programme, could cover H213 capex of around CNY300m and some short-term borrowings repayment. Fitch also expects Fufeng to be able to roll over the majority of its CNY1.74bn onshore short-term borrowings.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-EBITDA margin sustained below 10%
-FFO-adjusted net leverage above 3x on a sustained basis
-Weakening liquidity profile
-Loss of market leadership in the MSG business
Positive: Future developments that may, individually or collectively, leads to positive rating action include:
-FFO-adjusted net leverage below 2x on a sustained basis
-EBITDA margin sustained above 15%
-Sustained free cash flow generation
-Evidence of pricing power in the MSG business
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