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 consolidation.
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 expenditure plan.