Ratings has assigned Want Want China Finance Limited's senior unsecured USD600m 1.875% notes a final rating of 'A-'. The notes are irrevocably and unconditionally guaranteed by Want Want China Holdings Limited (Want Want). The notes are rated at the same level as Want Want's senior unsecured rating 'A-', as the notes represent direct, unconditional, unsecured and unsubordinated obligations of the company.The assignment of the final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 30 April 2013.
Key Rating Drivers
Dominant position, niche products: Want Want is one of the most recognised packaged food brands in China. Its key products - rice crackers, flavoured milk and soft candies - dominate their respective niche product markets in China; its rice crackers, for instance, have a strong cultural linkage, which drives their high demand just before Chinese New Year.
Management estimates that its market shares for key products range between 30% and 70% of the Chinese market. Fitch notes that these estimates may be different if the product categories are broadened. The agency, however, acknowledges Want Want's dominance, as evidenced by its significant pricing power, and its ability to defend its margins despite continuous increases in raw material prices. The company has kept EBIT margins well over 15% during the last five years, while maintaining a compound annual growth rate (CAGR) of 21.3% for sales.
Extensive distribution network: A key strength of Want Want that is not easily replicable is its nationwide exclusive distribution network, covering over 350 sales offices and around 8,000 distributors. The company uses this network to grow its sales in tier-3 and tier-4 cities and the modern organised retail route for growth in tier-1 and tier-2 cities. This, together with its investment in information technology, allows for significant savings in working capital management, and contributes to the company's pricing power and ability to respond rapidly to changes in demand patterns.
Fitch believes that Want Want will be able to continue its organic growth by expanding its distribution network in third, fourth and even fifth tier cities while maintaining its market position and high margins.
Net cash position: Want Want has maintained a conservative financial position, with a net cash position since its IPO in 2008. This is a result of a continuous positive free cash flow (FCF), the company's history of growing organically and its aversion to acquisitions. Want Want's current ratings are predicated on Fitch's view that the company will continue to maintain a net cash position.
Limited diversification: Want Want has a limited product portfolio compared with global peers rated in the single-A rating category, with just three main product categories. Its flavoured milk segment is dominated by a single product, Hot Kid Milk. Fitch acknowledges, however, that these products continue to command high organic sales growth and profit margins, and does not expect any material change to these factors over the next two to three years.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-failure to maintain net cash position
-organic growth falling below market rate or weakening of distribution networks leading to EBIT margin falling below 15% on a sustained basis
-increase in working capital, capex or dividend payout leading to failure to maintain positive FCF
Positive: No immediate positive rating pressure given its limitation on product diversification. Positive rating action may be considered only if Want Want achieves significant diversification of its current product portfolio on a sustainable basis.
