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April 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Want Want China Holdings Limited's (Want Want) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed Want Want's foreign-currency senior unsecured rating and the rating on wholly owned subsidiary Want Want China Finance Limited at 'A-'.
The affirmation reflects Want Want's strong 2013 performance with sales growth of 13.7%, a stronger EBITDA margin of 25.3% and enhanced net cash position of USD802m. Want Want continued to be the dominant player in niche packaged food markets in China with strong operational and execution capabilities and prudent financial position.
KEY RATING DRIVERS
Dominant Position, Niche Products: Want Want is one of the most recognised packaged food brands in China. Its key products - rice crackers, flavoured milk and soft candies - dominate their respective niche product markets in China. Its rice crackers, for instance, are traditional snacks eaten during the Lunar New Year and demand surges ahead of the festival.
Management estimates that its market shares for key products range between 30% and 70% of the Chinese market. Fitch notes that these estimates may be different if the product categories are broadened. The agency, however, acknowledges Want Want's dominance, as evidenced by its significant pricing power, and its ability to defend its margins despite continuous increases in raw material prices and labor costs in China. The company has kept EBIT margins well over 15% during the last five years while maintaining a compound annual growth rate (CAGR) of 22.2% for sales.
Extensive Distribution Network: One of Want Want's key strengths that cannot be easily replicated is its nationwide exclusive distribution network of over 350 sales offices and around 8,000 distributors. The company uses this network to expand its sales in Tier 3 and 4 cities and the modern organised retail route for growth in Tier 1 and 2 cities. Want Want in 2013 restructured its sales force into nine product divisions and divided China into 2,811 clusters, which would help the company advance market segmentation, respond rapidly to changes in demand patterns and further drive sales.
Fitch believes that Want Want will be able to continue its organic growth by expanding its distribution network in third, fourth and even fifth tier cities while maintaining its market position and high margins.
Continued Margin Expansion: Want Want managed to increase its EBITDA margin by 184bps in 2013 to 25.3% due to strong pricing power, optimization of sales mix and price declines for certain raw materials. Want Want will focus on launches of new high-margin products in 2014 and Fitch expects Want Want to keep the margin at this historical high level.
Net Cash Position: Want Want has maintained a conservative financial position, with a net cash position since its IPO in 2008. This is a result of a continuous positive free cash flow (FCF), the company's history of growing organically and its aversion to acquisitions. Want Want's current ratings are based on Fitch's view that the company will continue to maintain a net cash position.
Limited Diversification: Want Want has a limited product portfolio compared with global peers rated in the 'A' rating category (those rated 'A-', 'A' and 'A+'), with just three main product categories. Its flavoured milk segment is dominated by a single product, Hot Kid Milk. However, Want Want is trying to diversify its portfolio by launching more new products, which are expected to be around 50-70 stock-keeping units (SKUs) in 2014 compared with 20-30 SKUs historically. Fitch does not expect any material change to the product concentration factor over the next two to three years.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-failure to maintain a net cash position
-organic growth falling below market rate or weakening of distribution networks leading to EBIT margin falling below 15% on a sustained basis
-increase in working capital, capex or dividend payout leading to failure to maintain positive FCF
Positive: No immediate positive rating pressure given its limitation on product diversification. Positive rating action may be considered only if Want Want achieves significant diversification of its current product portfolio on a sustainable basis.