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Rating Action: Moody's assigns first-time Baa2 rating to YUNDA Holding; outlook stable
Global Credit Research - 10 Aug 2020
Hong Kong, August 10, 2020 -- Moody's Investors Service has assigned a first-time Baa2 issuer rating to YUNDA Holding Co., Ltd.
At the same time, Moody's has assigned a Baa2 senior unsecured rating to the proposed bonds to be issued by YUNDA Holding Investment Limited -- a wholly-owned subsidiary of YUNDA Holding -- based on the unconditional and irrevocable guarantee provided by YUNDA Holding.
The ratings outlook is stable.
The proceeds from the proposed issuance will be used for refinancing and general corporate purposes.
RATINGS RATIONALE
"YUNDA Holding's Baa2 issuer rating reflects the company's long operating history since 1999 and leading position in China's high-growth express delivery market. The company has achieved robust growth through increasing its market share while maintaining a pristine financial profile," said Ying Wang, a Moody's Vice President and Senior Analyst.
Based on industry data published by the State Post Bureau and the company's annual report, YUNDA Holding was China's second largest express delivery company by volume in 2019, with a 16% market share. Its total revenue has grown at a rate higher than the industry average over the past three years, driven by the company's consistent market share gains.
Moody's expects YUNDA Holding's revenue to grow to RMB55.5 billion over the next two years from RMB34.4 billion in 2019, supported by growing market demand, expanding network capacity and further improvements in service quality.
"The rating also considers YUNDA Holding's strong financial profile, which provides a buffer against risks arising from its future business expansion in the highly competitive express delivery market," adds Wang, Moody's lead analyst on YUNDA Holding.
Market share gains and the resultant robust cash flow generation, coupled with YUNDA Holding's disciplined capital spending, have enabled the company to maintain a solid financial profile. YUNDA Holding has generated free cash flow in the last four years and has maintained leverage well below 1.0x. The company has also consistently reported a net cash position, excluding short-term investments, averaging RMB1.2 billion since 2016.
Moody's expects the company's financial metrics to remain strong over the next 12-18 months, supported by its solid market position, continuous improvements in operating efficiency and prudent financial policy.
YUNDA Holding operates express delivery services across China using a quasi-principal business model. The company owns and operates its strategic transportation hubs that connect main logistic points across China, and partners with third-party franchisees to collect parcels from senders and deliver items to end-recipients. This business model allows the company to effectively control service quality without the need for heavy investment in last-mile delivery services.
YUNDA Holding's ratings also factor in its high investment needs and the intense market competition that could pressure its profitability in the medium term.
In order to improve service quality, YUNDA Holding has increased its investments in strategic asset ownership in recent years. The company's capital expenditure rose to RMB3-5 billion per year in 2018-2019, compared with the RMB1-2 billion annual investment prior to 2018.
Moody's expects YUNDA Holding will continue to invest in more strategic assets and technology platforms in the coming few years, as reflected in its budgeted capital requirements of RMB4-5 billion per year through 2022.
While such investments will reduce the company's free cash flow in the near term, they are critical in enhancing YUNDA Holding's operating efficiency and service capabilities. These investments will enable YUNDA Holding to broaden its service offerings, nurture new revenue sources and to differentiate itself from peers in the medium to long term.
Another factor constraining the ratings is the ongoing decline in unit pricing as a result of intense competition.
China's express delivery market remains highly competitive with little service differentiation, which in turn limits players' pricing power.
Moody's expects YUNDA Holding's continuous investment in technology and asset ownership to gradually differentiate it from peers and improve its pricing power.
As such, Moody's expects YUNDA Holding will gradually stabilize its operating margin as it enjoys economies of scale and reaps benefits from its technology investments.
YUNDA Holding has excellent liquidity. The company had around RMB2.9 billion in cash as of the end of March 31, 2020, excluding short-term investments. This, together with estimated operating cash flow of about RMB5.5 billion, is sufficient to cover the RMB2.6 billion in short-term debt, RMB0.67 billion in dividend payments and RMB4.5 billion of capex for the next 12 months.
YUNDA Holding's issuer rating is one notch lower than it would otherwise be because of the risk of structural subordination. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination.
With regard to governance consideration, YUNDA Holding's ratings also take into the concentrated ownership by its founder Mr. Nie Tengyun and his family members, and the pledge of some of the shareholdings in YUNDA Holding. The associated risks are mitigated by the family's track record of not imposing excessive shareholder distributions or other activities that could have significant adverse effects on YUNDA Holding's credit profile or materially increase the risk of a change of control.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects Moody's expectation that the company will continue to grow its revenue scale and scope while maintaining its prudent approach to capital spending and investments.
The rating could be upgraded if YUNDA Holding successfully expands its business scale and scope through providing total supply-chain management solutions to corporate clients, while maintaining its strong financial profile and liquidity.
Metrics indicative of an upgrade include (1) a consolidated operating margin above 10%; (2) solid free cash flow generation; and (3) consistent net cash position, all on sustained basis.
The rating could be downgraded if YUNDA Holding fails to maintain its market and financial positions because of (1) intensified market competition that reduces its revenue and profitability; (2) debt-funded investments or acquisitions that weaken its cash flow and liquidity; or (3) changes in its prudent financial policy.
Metrics indicative of a downgrade include (1) a consolidated operating margin below 5%; (2) a failure to generate free cash flow; (3) or debt/EBITDA above 2.0x or a net debt position, all on a sustained basis.
The principal methodology used in these ratings was Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Founded in 1999 and headquartered in Shanghai, YUNDA Holding Co., Ltd. provides express delivery service and other value-added logistics services through a nationwide network. The company completed its backdoor listing and debuted on the Shenzhen Stock Exchange in 2017.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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 www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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 www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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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.
Ying Wang 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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