Dagong Global Credit Rating Co., Ltd.
December 27th, 2016
Dagong Global Credit Rating Company Limited (“Dagong”) downgraded the issuer credit rating of Yuntianhua Group Co., Ltd (hereinafter referred to as “Yuntianhua Group”) from ‘AA+’ to ‘AA’, revised its outlook from negative to stable, maintained the Issue Rating of 2006 Enterprise Bond as ‘AAA’, and downgraded the Issue Rating of 2012 First Series Medium-Term Note, 2013 First Series Medium-Term Note and 2016 First Series Medium-Term Note from ‘AA+’ to ‘AA’. The rating results reflect that overcapacity in fertilizer industry was deteriorating since 2016, therefore the wealth creation capability as well as debt repayment capacity of Yuntianhua Group was weakened due to the decline of sales volume and price of its major products despite the strong competitiveness in the business scale in the industry. Agricultural Bank of China Limited (hereinafter referred to as the "Agricultural Bank") provides fully and unconditionally irrevocable joint liability guarantee for the 2006 Enterprise Bond, which still providing strong secure for the credit.
The main drivers of the ratings are as follows:
1. The deteriorated fundamentals of fertilizer industry adversely affected the operating environment for the companies in the industry. China’s political environment is stable and its core economic indicators were located in a proper range. Chinese government continues to implements proactive fiscal policy and prudent monetary policy, supporting a moderately relieving credit environment. However, since 2016, the companies negatively influenced by the difficult situation of fertilizer industry due to the deteriorated overcapacity, the narrowed price spread between fertilizer products and raw materials, the shrank export scale and the cancelled privilege on tariff and freight.
2. Wealth creation capacity of Yuntianhua Group was considered to be weakened. As the primary producer and seller of fertilizer products, Yuntianhua Group is holding the leading positon of its phosphate and compound fertilizer producing capacity in the industry; besides, as China's second largest glass fiber production enterprise, Yuntianhua Group has strong competitiveness in its business scale as well as cutting-edge technology. However, since 2016, the selling price of fertilizer products continued to decline caused by the recession of industry, consequently the production and sales volume of Yuntianhua Group dropped significantly, resulted in decreasing gross margin and profitability.
3. The reliability of fundamental debt repayment source was improved while the stability of overall debt repayment sources was less favorable for covering interest-bearing debt, therefore the degree of deviation between the debt repayment sources and wealth creation capacity was widened. Yuntianhua Group’s FCF was increasing year by year from 2013 to 2015, the coverage of profitability to maturity debt was showing a slight improvement benefit from the increasing FCF, which was mainly due to the gradual reduction of investment cash outflow after completion of construction projects. For the first three quarters in 2016, the revenue of Yuntianhua Group was 33.50 billion rmb, with an y-o-y drop of 26.09%, of which the income from phosphate fertilizer sector fell sharply to 7.67 billion rmb, shown a y-o-y significant decrease of 55.23%; as the proportion of realizable assets in total asset was decreasing, the liquidity of assets was weakened; moreover, the remaining credit limit is 38.99 billion rmb, which is insufficient for covering debt. Despite the worrying of lacking debt repayment sources, with fully and unconditionally irrevocable joint liability guarantee provided by Agricultural Bank, Yuntianhua Group’s 2006 Enterprise Bond would still be strongly ensured on its repayment liability.
4. The debt repayment capacity of Yuntianhua Group was reduced due to lower debt repayment sources. The coverage ratio of EBITDA to interest from 2013 to 2015 were 1.22, 0.80 and 1.95 respectively, which were lower than the industry average; as end of September 2016, the financial leverage was driven to a higher level with 83.02% debt to asset ratio, in which the short-term interest-bearing debt took a significant proportion, hence aggravated the debt repayment pressure of Yuntianhua Group, and there will be relatively limited room for further debt financing of Yuntianhua Group in the future due to declined profitability and large volume of short-term interest-bearing debt.
Based on all above listed valuations, Yuntianhua Group was deemed to have a decreased debt repayment capacity. However, by comprehensively considering the competitiveness of Yuntianhua Group such as the leading position and high phosphate and compound fertilizer producing capacity, and the weakness such as the lack of debt repayment sources and the decline of total debt security, Dagong holds a stable outlook to Yuntianhua Group in the next 1~2 years.