20220325-招银国际-BSTDF_–_Gradual_deleveraging_will_be_achievable._Buy_with_good_relative_value_3页_416kb

CMBI Credit Commentary Summary

Core Content

This credit commentary provides an analysis of Health & Happiness (H&H), a company under the CMBI Fixed Income Department, focusing on its financial performance, leverage situation, and future outlook. The key emphasis is on the company's ability to gradually deleverage and the potential for its bond yield to tighten, despite the challenges it has faced.

Key Points

Current Bond Valuation and Relative Value

• BSTDF (likely referring to a bond issue) has seen a 15-point correction in bond price following a failed USD bond issuance in January 2022.
• The current bond price reflects higher leverage and weak 2021 results.
• The commentary suggests that BSTDF is currently undervalued relative to its fundamentals, making it an attractive buy.

Operational Challenges in 2021

• H&H faced operational challenges due to the low birth rate in China.
• FY2021 sales increased by 3% year-over-year to RMB 11.5 billion, but EBITDA fell by 14% to RMB 1.8 billion.
• Net profit declined by 55% year-over-year after a write-down of one infant milk formula factory.

Increase in Leverage

• By December 2021, H&H's net debt had risen to RMB 7 billion from RMB 4.3 billion in December 2020.
• This increase was due to the acquisition of Zesty Paws for USD 610 million in September 2021.
• The Net Debt/EBITDA ratio increased to 3.8x from 2.0x in 2020.

Refinancing and Deleveraging Strategy

• Management has secured internal credit approvals for a new syndicated loan to refinance its bridge loans.
• The bridge loans total USD 500 million, with USD 350 million due in September 2022 and USD 150 million due in November 2022.
• The company is expected to use operating cash flow to gradually deleverage, with a track record of generating RMB 1.3 billion to RMB 1.4 billion in annual free cash flow during 2019–2020.

Future Outlook

• The core BNC business (57% of revenue) is expected to have flat sales growth over the next two years due to lower birth rates and intense competition.
• Management is targeting double-digit revenue growth in 2022, primarily through the newly acquired Pets Nutrition segment (PNC).
• EBITDA margins are expected to be 1–2 percentage points lower due to cost inflation.
• Dividend payout ratio has been reduced to 30%, from 50% in the previous two years, to support debt repayment.
• The company is estimated to generate RMB 500 million to RMB 1 billion in annual discretionary cash flow for debt repayment over the next two years.

Conclusion

The commentary concludes that H&H is in a position to achieve gradual deleveraging, supported by its operating cash flow and refinancing plans. The current bond price is considered to reflect over-leverage and weak results, presenting a relative value opportunity for investors.

Important Disclosures

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