Yihua Enterprise (Group) Co. Ltd. Downgraded To 'B-' On Weakening Liquidity And Capital Structure; Outlook Negative

  • Yihua faces rising liquidity pressure, given its low cash balance, meager free operating cash flow, and slower-than-expected cash collection from asset sales against sizable short-term debt maturities.
  • The company's strained access to long-term funds and uncertainty surrounding cash inflow leave little margin for error in refinancing.
  • On April 17, 2019, S&P Global Ratings lowered its long-term issuer credit rating on Yihua Enterprise (Group) Co. Ltd. (Yihua) to 'B-' from 'B'. We also lowered the issue-level rating on the company to 'CCC+' from 'B-'.
  • The negative outlook reflects Yihua's weakening capital market access and the execution risk in cash collection from real estate project firms within the next 12 months.
HONG KONG (S&P Global Ratings) April 17, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade is based on Yihua's weakened liquidity with sizable debt maturities in 2019 and 2020, only moderate amount of cash on its balance sheet, and a challenging refinancing environment for privately held companies in China.
Yihua's liquidity is strained. In 2019, the company faces Chinese renminbi (RMB) 4 billion maturities (RMB2.3 billion of straight maturity and RMB1.7 billion in puttable bonds). In 2020, debt maturities are RMB6.3 billion, including RMB4.8 billion in straight bonds and RMB1.5 billion in puttable bonds. We believe that Yihua could handle the 2019 maturities with a combination of cash on hand, timely cash collection from property projects, and potential divestiture of its large liquid equity investments. However, the company will be dependent on the capital market to extend and refinance its 2020 maturities.
Since mid-2018, private-owned enterprises in general have had difficulty obtaining liquidity from banks and longer-term capital from the debt market. Yihua is no exception. In 2018, the company increasingly relied on short-term debt issuances to refinance maturities and fund its aggressive acquisitions in healthcare services. With limited access to long-term funding, the company's capital structure weakened and added to its maturity wall in 2019 and 2020. Yihua has only issued RMB1.4 billion in bonds since Sept. 30, 2018, to repay RMB981 million in early redemption puttable bonds. The RMB400 million balance from the issuance was insufficient to extend its 2019 maturities.
Yihua's large portfolio of liquid equity investments and plans to introduce strategic investors in its healthcare business could provide some support to liquidity. As of March 25, 2019, the portfolio is valued at RMB3.3 billion. Although the portfolio could convert to cash with a minor discount (about 3%-5%), we do not expect the company to view the portfolio as a primary source of liquidity. The portfolio consists mainly of A-shares listed consumer and technology firms.
Yihua's slower-than-expected cash collection of proceeds from Poly Real Estate Group Co. Ltd. added to its current liquidity pressure. The cash received from the four property projects in 2018 were about RMB900 million, far lower than the RMB2 billion-RMB3 billion that we originally forecasted as some projects progressed slower.
We deem the probability of collecting the remaining project cash to be high but foresee some uncertainty in timing over the next 12-24 months. The timing depends on the projects obtaining construction permits and construction loans from banks. Now that 51% equity transfer of all four projects has been completed, we think both Poly and Yihua have strong incentives to speed up the process. Under our base case, we estimate that Yihua will receive RMB1.5 billion-RMB2.0 billion of cash from Poly in 2019 and RMB2.0 billion-RMB2.3 billion in 2020. Our assumptions do not include sharing of cash flows from future contract sales of the four projects, given that both the amount and timing are uncertain.
We see meaningful execution risks in the refinancing plan especially regarding repayment of the sizable maturities in 2020. Yihua still has several levers it could pull to meet the payment, including cash injections from strategic investors, potential mortgage financing from banks, and profit sharing from real estate projects. However, the visibility of these options is still limited and the total estimated amount is not significant enough to repay the RMB6.3 billion coming due. The company's ability to refinance hinges upon successful execution of all the plans above as well as access to the capital market.
Yihua's market access may have weakened with the recent stock exchange enquiry. In March 2019, Yihua Healthcare received an enquiry from the Shenzhen Stock Exchange into potential stock manipulation by a company insider. The company has responded denying the allegation and received no penalty, yet the incident could have a negative effect on the company's refinancing efforts. This could further limit its access to funds and add to its liquidity pressure.
We expect free operating cash flow to turn positive in the coming 12-24 months as Yihua curbs capital expenditure and new acquisitions, given its tight liquidity. We forecast improving operating cash flow and working capital, given construction of most self-owned property is complete and the divestment of the property business is ongoing. Yihua will likely remain highly leveraged with a heavy reliance on refinancing. Its debt-to-EBITDA ratio may worsen to 8.0x-9.0x in 2018 before deleveraging to 7.0x-7.5x in 2019. We also expect Yihua's EBITDA to interest coverage to slightly weaken to 1.8x-2.1x in 2018 and 2019 from 2.5x in 2017.
The negative outlook reflects a potential for another one-notch downgrade if Yihua's access to the capital market further weakens or cash collection progresses slower than expected, which would exacerbate the liquidity and refinancing pressure facing the company.
We could lower the rating in 12 months if Yihua's liquidity further worsens due to further delay in the cash collection from real estate business or equity injection from strategic investors.
We could revise the outlook to stable if Yihua's market access is reestablished or visibility to the cash inflow improves such that the plan for refinancing their debt maturities in 2019 and 2020 become credible and feasible.
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