Duration Financial News, on February 23, Moody's has confirmed China Mengniu Dairy Company Limited, referred to as "Mengniu Dairy", 02319HK) issuer rating and senior unsecured rating. The outlook remains stable.
Ying Wang, vice president and senior analyst at Moody's, said: "The confirmation of the rating reflects the company's improved business position, driven by its modest expansion in market coverage and product portfolio, as well as further integration of its upstream business. ”
The rating also takes into account the company's disciplined cost control, efficient working capital and well-paced investment program, all of which have enabled the company to generate strong cash flow and a growing cash balance despite slowing revenue growth. Wang added.
Rating justification. Mengniu Dairy's issuer rating of "BAA1" reflects its leading position in key dairy businesses, excellent distribution strength and integrated business model.
The rating also takes into account the company's operational support from its strategic shareholder, COFCO Corporation, as Mengniu Dairy and COFCO jointly develop a premium dairy business domestically in line with China's ** food safety policy.
These advantages are offset by the industry's food safety concerns, product competition, and capital requirements for business expansion. Moody's also considered its unconsolidated subsidiary, China Modern Dairy Holdings Ltd, 01117HK), the majority of the company's revenue comes from raw milk sales.
Mengniu Dairy is the second-largest dairy producer in China by revenue and the eighth-largest dairy company in the world in 2023.
Over the past three to four years, Mengniu Dairy has expanded its market coverage into Australia and Southeast Asia, expanding its products** from liquid milk to more profitable products such as cheese and fresh milk.
At the same time, by increasing investment in partner companies, including Modern Dairy, Mengniu Dairy has increased its access to high-quality upstream products, thereby enabling Mengniu Dairy to upgrade its products and maintain stable and high-quality products.
Over the past 12-18 months, Mengniu Dairy's revenue growth has slowed to 5%-7%, compared to more than 15% in 2021, reflecting weaker consumption in China amid greater macroeconomic challenges. Moody's**, the company's annual revenue growth will remain at a slow level of around 5% over the next 12-18 months.
However, the company's improved business diversification and targeted cost control may offset the impact of slower revenue growth, allowing it to maintain stable profitability and strong operating cash flow.
Moody's expects Mengniu Dairy's adjusted EBITDA margin to be around 11 over the next 12-18 months5%, which is in the range of 11%-12% in the last 1-2 years. Strong operational synergies between the company and its key upstream ** players and increasing product diversification will also support its steady EBITDA growth.
Since 2022, Mengniu Dairy has been actively increasing its cash holdings through the issuance of low-cost onshore bonds in order to pre-finance its US dollar bonds maturing between 2023 and 2025. As of June 2023, its total adjusted debt increased by about CNY20 billion to CNY47.1 billion, while total cash and cash-like resources, including bank deposits, saw a similar increase.
Considering the expected repayment of maturing US dollar debt, Moody's expects Mengniu Dairy's leverage ratio to fall to 33 times and further from 2022 in December 2024The temporary high of 7 times fell to 28 times. The company's net leverage has remained low over the past few years.
Although Mengniu Dairy holds 5636% of the shares, including direct holdings and holding of its exchangeable bonds, but the latter's financial data are not included in Mengniu Dairy's financial reports as Mengniu Dairy's voting rights are less than 50% of Modern Dairy's voting rights. Moody's believes that Mengniu Dairy's strengthened business conditions and conservative financial planning can mitigate the impact of Modern Dairy's high financial leverage and high business volatility.
Mengniu Dairy's liquidity is excellent. As of the end of June 2023, cash and cash-like resources, including bank deposits, totaled RMB42 billion. This, combined with the expected operating cash flow over the next 12 months, is sufficient to cover the company's short-term debt, capital expenditures and dividend payments for the same period.
Moody's expects Mengniu Dairy to generate positive free cash flow over the next 12-18 months, driven by its stable profitability, efficient working capital cycle and conservative investments. According to Moody's**, the company will achieve a net cash position by the end of 2024.
Moody's expects Mengniu Dairy's annual total investment needs to fall by about 40% to RMB5 billion over the next 2-3 years, given that the company's strategic focus over the next 2-3 years shifts from expansion to efficiency.
The rating also takes into account the following environmental, social and governance (ESG) factors:
Mengniu Dairy's environmental and social risk exposure reflects the company's high reliance on natural capital and exposure to risks such as related customer relationships and production.
The company's governance risk exposure reflects its balanced financial policy and a reputable and experienced management team. Although the company's board of directors is in the minority and its strategic stakeholders are state-owned COFCO and Denmark-based Arla Foods, its long-standing prudent financial management supports its low leverage and strong liquidity position, which mitigates these risks.
Factors that can cause rating upgrades or downgrades.
The stable outlook reflects Moody's expectation that the company will (1) maintain product quality to reduce food safety risks; (2) prudently manage its capital expenditures and investments; (3) Maintain sufficient liquidity.
In the medium term, Moody's may upgrade Mengniu Dairy if: (1) it achieves its goal of becoming an integrated dairy producer in the next 1-2 years; (2) building a more diversified product portfolio; (3) generate cash flow from operations sufficient to cover its capital needs and investments; and (4) the implementation of strict financial discipline to maintain the adjusted debt EBITDA ratio at 20 times or less, and maintain a net cash position.
On the other hand, Moody's may downgrade Mengniu Dairy's rating if: (1) Mengniu Dairy's operating cash flow generation continues to weaken due to the failure of its product mix upgrade strategy or food safety issues; (2) declining profit margins, which negatively impacts its leverage and financial flexibility, or (3) a large number of acquisitions by the company with debt.
Credit indicators that indicate downward pressure on the rating include: (1) EBITDA margin fell to 60%-6.less than 5%; (2) The adjusted debt EBITDA ratio rose to 33 times or more, or (3) consistently negative free cash flow.
Given the strategic importance of Modern Dairy to Mengniu Dairy, any significant deterioration in Modern Dairy's operations and financial condition will have a negative impact on Mengniu Dairy's ratings.
China Mengniu Dairy*** and its subsidiaries produce and sell high-quality dairy products in China. Listed on the Hong Kong Stock Exchange in 2004, the company is a leading dairy producer in China, with Mengniu as its core brand.