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Hong Kong, March 16, 2023 — Moody’s Investors Service has assigned a first-time Baa3 issuer rating to MeiHua Holdings Group Co., Ltd (Meihua).
The rating outlook is stable.
RATINGS RATIONALE
“Meihua’s Baa3 issuer rating reflects the company’s strong position in the core amino acids business in terms of market share, supported by its cost advantage due to better technology; operation integration and efficiency; a balanced product mix; stable end demand and a diversified customer base,” says Roy Zhang, a Moody’s Vice President and Senior Analyst.
“The rating also reflects the company’s track record of prudently managing its business expansion, such as proactively improving its capital structure, reducing debt and maintaining low leverage through business cycles while increasing its market share,” adds Zhang.
Meihua generates steady operating cash flow throughout the business cycle. The company has efficient working capital management and receives cash or prepayments for most of its sales. Its financial leverage, as measured by debt to EBITDA, is strong for the company’s rating level and provides a buffer during periods of market uncertainty.
However, the rating is constrained by the company’s limited operating scale along with commodity attributes. Meihua’s product differentiation is not high and its products compete on pricing.
At the same time, the rating also reflects the company’s exposure to highly negative environmental risks and moderately negative social risks in relation to its activities in the food, protein and ingredients segments. These risks are mitigated by the company’s neutral to low governance risk, with its solid capital structure providing a financial buffer; its sound execution skills; and its balanced product portfolio.
Meihua’s revenue grew to RMB27.9 billion in 2022 from RMB6.9 billion in 2011. Meihua’s products are widely used in food and beverage, healthcare, livestock and poultry breeding as well as the oil and gas industry. The majority of demand is related to household daily consumption, with lower volatility and higher value over time. The company has expanded its capacity to meeting such demand growth. In addition, its cost advantage has enabled it to gain market share from its peers throughout the industry cycle.
Industry consolidation and environmental protection initiatives have improved the competitive landscape, leading to better pricing power for leading producers.
Meihua has benefited from such consolidation, as it has enabled the company to maintain high utilization and good profitability through a volatile operating environment caused by the coronavirus pandemic and the surging costs of raw materials like corn and coal in 2020 and 2021. The company maintained EBITDA margins of 16.5%-18.5% in these two years, compared with 19%-22% before the pandemic. Moody’s expects the company to sustain solid profitability over the next 12-18 months.
Meihua has improved its capital structure in recent years by reducing debt and increasing the use of long-term financing. Its total debt declined to RMB5.0 billion in 2022 from RMB6.6 billion in 2018. At the same time, it reduced its short-term debt to RMB1.3 billion as of the end of 2022 from RMB5.4 billion as of the end of 2018. The company’s short-term debt as a percentage of total debt declined to 27% as of the end of 2022 from 82% as of the end of 2018.
Moody’s expects the company’s leverage to be around 0.8x as of the end of 2023. Its strong operating cash flow and limited capital spending needs will support a further improvement in its capital structure.
Meihua’s liquidity is excellent. As of 31 December 2022, the company’s RMB4.3 billion of cash and cash-like assets, together with its Moody’s projected operating cash flow, are sufficient to cover its maturing debt and capital spending needs over the next 18 months. The company has generated free cash flow in 2021 and 2022, a trend Moody’s expects the company to sustain over the next 12 to 18 months.
Meihua’s issuer rating is not affected by structural subordination. This is because the holding company directly runs significant operations and owns fixed assets, which will likely support the expected recovery for the holding company’s debt.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental, social and governance (ESG) considerations have a moderately negative credit impact on Meihua’s rating, as a result of highly negative environmental and moderately negative social considerations. This is mainly due to the company’s exposure to natural capital risk, as well as customer relations and responsible production risks as a supplier to the food industry.
Meihua has a highly negative credit exposure to natural capital risk, in line with the protein and agriculture sector’s high inherent exposure to this risk category in Moody’s environmental risk heat map. This reflects the sector’s heavy reliance on natural resources, such as corn, for raw materials.
These risks are partially offset by Meihua’s neutral-to-low governance risk, reflected in its prudent financial policy with low leverage and excellent liquidity, along with its solid management track record and market leader position.
Meihua has a track record of using technology and process improvement to reduce water usage and energy intensity, including increasing the adoption of renewable energy and recycling water through water treatment facilities. With better technology, it can also increase product output with the same amount of raw material. Indirectly, Meihua’s products can help its clients in the animal feed industry to fulfill nutrition needs with less animal feed, resulting in overall less consumption on natural capital.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody’s expectation that Meihua will maintain its market leader position, generate positive operating cash flow and maintain its very strong liquidity and low leverage over the next 12-18 months.
Upgrade pressure on the rating could emerge if the company demonstrates a longer track record of prudent financial policy, such as maintaining its low leverage and excellent liquidity, while growing its scale and market share, on a sustained basis.
On the other hand, downgrade pressure on the rating could emerge if the company’s liquidity management weakens, its market position and operations worsen, or it fails to maintain a prudent financial policy or its total debt to EBITDA at above 3x on a sustained basis.
The principal methodology used in these ratings was Protein and Agriculture published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356422. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Founded in 2002, MeiHua Holdings Group Co., Ltd is a China-based producer of biological fermented products, including mainly animal nutritional amino acids and food-taste optimization products. The company is headquartered in Langfang, China, has manufacturing facilities in Inner Mongolia, Jilin and Xinjiang, and distributes its products domestically and internationally. Meihua listed on the Shanghai Stock Exchange in 2010.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
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Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Roy Zhang
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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