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June 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Bright Food Group Co., Ltd.'s (Bright Food) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed Bright Food's foreign-currency senior unsecured rating and the rating on its indirectly wholly owned subsidiary Bright Food Hong Kong Limited (Bright Food HK) at 'BBB-'.
The affirmation reflects a 'BB' standalone rating of Bright Food with a two-notch uplift to 'BBB-' from Shanghai government support. The company's financial leverage remains high, mainly due to 2H13 spending in property business and the Tnuva acquisition in 2014. However, the business profile has been enhanced. With the stronger tangible support from Shanghai's State-owned Assets Supervision and Administration Commission (SASAC), witnessed in continuous assets injection and restructuring, Bright Food now has better access to equity financing and maybe able to deleverage faster than before.
KEY RATING DRIVERS
Support from Government: Bright Food's ratings benefit from a two-notch uplift from its strong linkage with Shanghai SASAC, which fully supports Bright Food's role in securing food security of Shanghai residents. Strong tangible support from the government is demonstrated in the recent asset injection of Shanghai Vegetables Group, which satisfies the majority of the daily vegetables demand in Shanghai, and is an important platform for the Shanghai government to stabilise and regulate the supply and price of the basic food market. Government support also includes the capital injection from Shanghai SASAC and the annually increasing government subsidies.
Acquisitive Strategy Pressures Leverage: Leverage, measured by FFO adjusted net leverage ratio, has increased sharply in recent years to 5.7x in 2012 and 5.8x in 2013, up from under 2.0x before 2010, a result of a series of transactions including acquiring Manassen Food in 2011, Weetabix in 2012, and large investments in property market in 2013. Fitch expects the leverage could be even higher in 2014 as the debt-funded Tnuva acquisition is expected to be completed in November.
Although the Tnuva acquisition drives up Bright Food's financial leverage, the company's business risk profile meanwhile has been enhanced by synergies from product innovation, herding technology, cost saving and overseas resources.
Fitch also expects debt reduction in 2015 through the disposal of Bright Food's substantial financial and non-core assets as well as potential equity offering.
Non-property business improved: Bright Food invested aggressively in 2013 to beef up its real estate arm. The aggressive land acquisitions in 2H13 temporarily pushed up working capital requirement and its financial leverage.
However, the underlying financial profile of Bright Food's non-property business in 2013 improved with higher EBITDA margin and lower leverage. Fitch expects near-term cash inflow from property sales, supported by the large land inventory and the Shanghai Haibo restructuring. The property sector spending in 2013 should be short-term drag on the group's financial leverage, rather a cash drain in the next couple of years.
Operating in defensive industries: Bright Food generates most of its revenue and EBITDA from food-related businesses, that account for 85% of revenue and 73% of EBITDA in 2013 and have witnessed stable growth since 2005. The taxi and logistics businesses also have a stable earnings record, particularly a result of continuous government grants to offset the rising fuel costs. Five of the nine core segments generate a significant portion of its revenue and EBITDA from Shanghai, one of the largest and most economically advanced municipalities in China. Bright Food is also among the top three domestic players with an established nationwide presence in industries such as diary and sugar, Regional business concentration: Bright Food's entrenched presence in Shanghai and eastern China allows it to enjoy synergies from its diversified operations within these markets. However, the lack of an integrated nationwide presence limits the benefits the company can derive from new products it has acquired through recent overseas investments.
Leakages to Minority Shareholders: Minorities interest of Bright Food is around half of the group's consolidated share equity. Profits attributable to minority shareholders amounted to about 50% of the group's consolidated net profit in the past five years. Removing the minority interests, the scale of the group is materially smaller. However, since a significant portion of debt is held under its subsidiaries with large minority interests, the debt burden of the group is therefore substantially shared by its minority shareholders accordingly.
Factors that may, individually or collectively, lead to positive rating action include:
- improved operational integration of most of its business segments resulting in material margin expansion or
- FFO adjusted net leverage sustains below 3.0x
Factors that may, individually or collectively, lead to negative rating action include:
-further acquisition or failure/material delay of debt reduction plan leading to leverage rising above 4.5x
-evidence of weakening government support