Fitch Rates Yestar's Proposed Notes 'BB-(EXP)'
The notes are rated at the same level as Yestar's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received.
KEY RATING DRIVERS
Steadily Growing IVD Business: Yestar entered the IVD market in China in 2014 and has acquired two IVD distributors that have established partnerships with IVD leader Roche Diagnostics. The distributors also have long-term relationships with hospitals, stable profitability, and a strong market position in distributing Roche-branded IVD products across eastern China. China's IVD market is expanding rapidly due to strong demand, and faces low cyclicality. Fitch expects IVD to account for around 80% of Yestar's total EBIT in 2016 and will be the company's main growth driver.
Imaging Business Stable: Fitch expects profit contribution from Yestar's business of distributing imaging equipment to remain stable in the near term despite limited top-line growth. The imaging segment is a mature business with firm customer base, established distribution networks and minimal capex requirements. Fitch believes that Yestar's imaging business will provide stable cash flows that support its rating.
Increased Working Capital Demand: Fitch expects Yestar's working capital requirements to increase significantly as IVD takes up a larger part of Yestar's business. Yestar's accounts receivable days for local hospitals stretch from four to six months while accounts payable days to supplier Roche Diagnostics is significantly shorter. In comparison, Yestar's credit terms with imaging products supplier Fujifilm are much more lenient than the credit terms Yestar offers to its imaging customers.
Execution and Integration Risks: Yestar has been operating its newly acquired IVD business for less than two years, and has yet to complete the progressive acquisition of 100% of each of the IVD distributors. Execution and integration risks, such as preserving its existing customer base and being able to obtain new customers, remain significant, but Fitch believes that Yestar's successful track record in running its imaging distribution business, the high cost of switching IVD systems for hospitals, and Roche's strong brand name in IVD, will reduce the likelihood of Yestar failing to maintain the existing business model.
Strong Financial Profile: Yestar has previously consistently been in a net cash position due to strong cash flow from the imaging distribution business and low operating leverage. Fitch expects Yestar's FFO net leverage to peak at 2.3x in 2018 as it gradually completes the acquisitions of the stakes it does not already own in the IVD distributors. The company is likely to deleverage in 2019, assuming no further M&A or equity injections.
Growth through M&A: Fitch expects Yestar to continue to grow through M&A, but it remains to be seen whether the company will continue to employ a consistent and prudent M&A strategy while maintaining a strong balance sheet.
Fitch's key assumptions within the rating case for Yestar include:
- EBITDA margin to remain around 16%-17% between 2016 and 2018
- Acquisition of remaining 30% stake in IVD distributor Jiangsu Uno in 2H17
- Acquisition of remaining 30% stake in IVD distributor Anbaida in 2H18
Positive: Future developments that may lead to a positive rating action include:
- Significant increase in operating scale, brand partners and geographic diversification while keeping FFO net leverage below 2.5x on a sustained basis
Negative: Future developments may lead to a negative rating action include:
- FFO net leverage above 2.5x on a sustained basis
- EBITDA margin below 15% on a sustained basis
- Sustained material decline in revenue growth of existing distributors