Fitch Affirms Want Want at 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Want Want China Holdings Limited's (Want Want) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook on the IDR is Stable. The China-based packaged food producer's senior unsecured rating and the rating on its outstanding USD600m guaranteed notes issued by wholly owned subsidiary Want Want China Finance Limited have also been affirmed at 'A-'. The notes are guaranteed by Want Want.
Want Want's ratings continue to be supported by the company's strong financial profile and dominant position in its key product categories, despite a fall in sales. Over the longer term, Want Want's product concentration could be a weakness as growth in the packaged food market in China slows and competition increases.
KEY RATING DRIVERS
Dominant Position, Niche Products: Want Want is one of the most recognised packaged food brands in China. Its key products - rice crackers, flavoured milk, soft candies, popsicles and ball cakes - dominate their respective niche markets in China. Over the years Want Want has demonstrated significant pricing power and an ability to defend its margins through the cycle. The company has kept EBIT margins well over 15% over the past five years.
Solid Financial Profile: Want Want has maintained a strong financial profile in the past five years, with high margins, robust FFO and a net cash position. Fitch expects the company to continue to generate positive free cash flow in 2016 driven by lower working capital and capital expenditure requirements. Fitch believes the company will maintain a net cash position by paying dividends and buying back shares only from free cash flow in 2016.
High Product Concentration: Want Want has a limited product portfolio compared with global peers rated in the 'A' rating category (those rated 'A-', 'A' and 'A+'). Its key product, Hot Kid Milk, accounted for 45% of total revenue in 2015. While Want Want has been trying to diversify its portfolio, new products only accounted for 2%-5% of total revenue over the past several years.
Fitch believes that Want Want's heavy reliance on several core products is one of its key business risks. Revenue fell by 9% in 2015, driven by a 14% decline in the dairy segment. The weakness in the dairy segment was driven by weakness in the dairy market, intense price-based promotion and increasing competition in the dairy industry and, shifting consumer preferences. Fitch does not expect an immediate recovery in 2016. Fitch believes revenue growth over the longer term will depend on Want Want's ability to innovate and launch new products.
Diversification Will Not Hurt Margins: Want Want is taking steps to expand its product portfolio and diversify revenues. The company recently re-organised the sales team and refined its product classification to apply differentiated marketing strategies to push new product sales, as well as the sales of "high potential" products, which in total accounted for 10%-15% of its revenue. Want Want will focus marketing resources in 2016 on a group of new, differentiated products. Despite these measures, Fitch expects margins to remain stable in the next 12-18 months as lower raw material costs will help offset the potential increase in marketing and promotional expenses.
Fitch's key assumptions within our rating case for the issuer include:
- Mid- to high-single digit revenue decline for the dairy segment in 2016 and 2017; low single-digit revenue growth for other divisions
- Higher gross profit margins that reflect lower input cost
- EBITDA margin in the range of 24%-25% in 2016 and 2017
- Lower capex of USD150m in 2016 and 2017
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained decline in revenues for core products
- Failure to develop new products with meaningful revenue contribution over the long term
- EBIT margin sustained below 18%
- Failure to maintain net cash position
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
Considering the limited operational scale and the lack of portfolio diversification, no positive rating action is envisaged over the next 12 months.