Dec 17 -
Summary analysis -- Tingyi (Cayman Islands) Holding Corp. --------- 17-Dec-2012
CREDIT RATING: BBB+/Stable/-- Country: Cayman Islands
Credit Rating History:
Local currency Foreign currency
05-Jun-2012 BBB+/-- BBB+/--
The rating on China-based food and beverage company Tingyi (Cayman Islands)
Holding Corp. reflects the company's strong brand awareness in China's food
and beverage market, its dominant market positions in instant noodles and
ready-to-drink (RTD) tea segments, and its extensive national distribution
network. The company's good working capital management and disciplined
financial management offer additional support. Tempering these strengths are
Tingyi's exposure to volatile raw material costs, integration risk from a
bottling business with PepsiCo Inc. (A/Stable/A-1), and fierce market
competition. We view Tingyi's business risk profile as "satisfactory" and its
financial risk profile as "intermediate".
Tingyi derives significant benefits from consumers' confidence in its brand,
Master Kong, one of the best known in China. The company's good track record
in food safety--a major concern among Chinese consumers in recent years--has
strengthened brand awareness.
Tingyi's operating and financial performances are satisfactory, and were in
line with our expectation for the first nine months of 2012. We expect Tingyi
to maintain its dominant domestic market positions with leading market shares
(by sales volume) despite more intense competition, which AC Nielsen reported
on Sept. 30, 2012, as 44.2% for instant noodles and 48.1% for RTD tea. The
fast growth of its traditional juice drinks segment and the integration with
the PepsiCo bottling business helped Tingyi's market share in diluted juice
drinks increase to 28.9% in the third quarter of 2012 from 19.7% in the first
quarter of 2012, head-to-head with Coca Cola.
Tingyi's market strength provides strong bargaining power over suppliers and
distributors. This advantage supports Tingyi's short cash-conversion cycle and
ensures strong working capital management. In addition, Tingyi's large
distribution network ensures good market penetration, gives the company a
strong competitive advantage over its domestic and international peers, and
helps to maintain its market lead.
We expect Tingyi's margins to remain under pressure in 2013 because of
fluctuations in raw material prices, which comprise the bulk of production
costs. Nevertheless, we believe that the company is capable of mitigating the
risk by further improving its product mix and production efficiency, including
through technological advancements. We also believe the company can better
manage the risk than its peers due to its business scale and branding
strength. Tingyi's margins have improved in the past few quarters due to lower
raw material prices and strengthened production efficiency. This is despite
the increase in operating expenses due to fierce competition and the PepsiCo
We expect competition with international and domestic brands to remain
intense, especially toward securing shelf space. The resulting pricing
pressure prevents Tingyi from fully passing through rising material costs to
customers, and this could further strain profitability.
Tingyi has integrated the PepsiCo bottling business in line with our
expectation so far, but any missteps could still undermine the company's
bottom-line performance, in our view. We believe the company's strategies to
turn around the profitability of the business, particularly through leveraging
its strength in distribution, remain credible under the current business
environment. In our view, PepsiCo's Chinese bottling business is likely to
break even in 2013.
Tingyi's disciplined financial management and stable cash flow generation
support its financial risk profile. The company prudently managed its balance
sheet and controlled leverage during its expansion period. From 2007 to the
first half of 2012, the company maintained a ratio of total debt to EBITDA of
0.5x-2.0x and a ratio of total debt to total capital of 16.9%-35.3%, which are
good levels for the rating category. We expect the company's cash flow
generation to remain strong and sustainable over the next two to three years.
In our base-case projection, we expect Tingyi's total debt to EBITDA ratio to
stay about 1.0x-2.0x and the ratio of total debt to total capital to be
30%-40% over the next few years.
Tingyi has "adequate" liquidity, as defined in our criteria. The company's
sources of liquidity, including cash and available facilities, will exceed its
uses by 1.2x or more over the next 12-24 months. Our liquidity assessment
incorporates the following factors and assumptions:
-- Sources of liquidity include unrestricted cash of about US$1.47
billion as of Sept. 30, 2012 and funds from operations (FFO) of about US$1.0
billion. The company also has about US$400.0 million in committed undrawn
banking facilities as of that date.
-- Uses of liquidity include committed capital expenditure, working
capital needs, debt repayments, and dividend payouts (it typically maintains a
payout policy of 50%) over the next 12 months. As of Sept. 30, 2012, Tingyi
has short-term debt of US$422.2 million.
-- Net sources will remain positive and the company has sufficient
headroom within its financial covenants even if EBITDA declines more than 15%.
-- Tingyi has good standing in the credit markets, particularly with
Japanese and Taiwanese banks.
The stable outlook reflects our expectation that Tingyi will continue to make
good progress in consolidating the PepsiCo bottling business, and therefore
will gradually broaden its brand diversity. We also expect the company to
maintain satisfactory profitability, generate positive free operating cash
flows, and maintain conservative leverage such that total the debt-to-EBITDA
ratio does not exceed 2x.
Although less likely, we could consider a higher rating if the company
increased the number of brands and products, and geographical diversity, while
demonstrating greater resilience in terms of profit margins. An upgrade would
also be dependent on the company retaining a very strong market position in
its key products and maintaining its conservative financial risk profile.
We could lower the rating if we expect Tingyi's ratio of total debt to EBITDA
to exceed 2.0x on a sustained basis. This could happen if the company fails to
maintain its market position, poorly executes the PepsiCo integration or its
growth strategy, or undertakes a more aggressive debt-funded capital