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June 13 (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
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
- 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
-further acquisition or failure/material delay of debt reduction plan leading to
leverage rising above 4.5x
-evidence of weakening government support