Corporate China Tingyi (Cayman Islands) Holding Corporation Ratings Overview Issuer Rating ▪ Pengyuan International has assigned a first-time global scale long-term issuer LT Issuer Credit Rating A- credit rating (LTICR) of ‘A-’ to Tingyi (Cayman Islands) Holding Corp. (Tingyi), with a stable outlook. Outlook Stable ▪ Tingyi’s ratings are supported by its leading market position in China, exceptional leverage profile and long record of low volatility operations. The Company’s rating is constrained by its limited geographic diversity and competition within the China market. ▪ Founded in 1991, Tingyi, through its subsidiaries, engages in the production Contents and distribution of instant noodles and ready-to-drink beverages in the People’s Republic of China. For more than 17 years Tingyi has had the largest Key Rating Drivers ........................ 1 market share in both instant noodles and ready-to-drink tea. In terms of revenue, the Company is the fifth largest publicly traded food and beverage Business Profile…………………....4 company in China. Financial Profile…………………….6 Liquidity ........................................ 8 Rating Outlook Company Background .................. 8 Peer comparison ........................... 9 ▪ The stable outlook for Tingyi reflects Pengyuan International’s expectation that the Company will be able to maintain its market position and operational Rating Scores Summary ............. 12 strength. Related Criteria ........................... 12 ▪ We would consider downgrading Tingyi’s issuer credit rating if: 1) EBITDA Margins decreased to below 8% on a sustainable basis. 2) There was a rapid decrease in market share for key products due to rising competition. 3) The Company undertakes aggressive acquisitions and weakens its liquidity We would consider an upgrade of Tingyi’s issuer credit ratings if: 1) There is a sustained increase in market share. 2) The company strengthened its product offering by having more financially successful premium priced products Contacts Financial Summary Primary Analyst Exhibit 1: Financial Ratios Name Jonathan Joseph Tai, CFA 2018A 2019A 2020F 2021F 2022F Title Analyst Debt/EBITDA 0.9x 0.7x 0.2x 0.2x 0.1x Direct +852 3615 8276 EBITDA Interest Coverage 16.9x 16.8x 17.3x 15.1x 15.0x Email [email protected] Gross Debt/Capitalization 31.5% 34.9% 37.7% 37.4% 36.8% FFO/Debt 93.5% 127.8% 337.8% 425.8% 641.6% Secondary Analyst OCF/Debt 112.1% 135.4% 388.2% 307.8% 504.8% Name Brian Lam FCF/Debt 90.7% 95.5% 290.2% 162.3% 266.8% Title Director Direct +852 3615 8339 ROIC 10.4% 14.5% 16.9% 15.7% 16.4% Email [email protected] Source: Company, Pengyuan International estimates 24 November 2020 Page | 1 RA02050200005 Corporate China Key Rating Drivers Credit Strengths • Leading market position. Tingyi has long been one of the top players in the packaged food and beverage industry and it has been the absolute top player in China for instant noodles and ready-to-drink (RTD) tea. It had 43.3% and 45.7% of the instant noodles and ready-to-drink tea sales volume in China in 2019. This vastly outmatched its nearest competitor, UPC, who had roughly 34% and 38% of Tingyi’s revenue in instant noodles and beverage that year. In addition, the company has strong market positions in other product categories like juice, ready-to-drink coffee and carbonated drinks where in each sector it ranks second by market volume in China. • Strong leverage Profile. Despite having a gross debt-to-capitalization ratio of 35%, Tingyi has minimum amount of net debt. The company has very strong net debt-to-EBITDA, EBITDA interest coverage and FFO-to-net debt ratios, suggesting that it has a strong capability to service its debt obligations and assume more debt. Net debt-to-EBITDA has been decreasing for the last few years and is fluctuating near zero because the company has reported a net cash position since FY2018. Likewise, the interest coverage ratio has been improving for the last few years. We believe the company’s overall leverage will remain very healthy despite the fact that its gross debt-to-capitalization ratio could see a small increase in FY2020-21. We expect it to rise to 38% from 35% in 2019 as a result of its recent bond issuance. • Long record of low volatility operations. Tingyi has a track record of maintaining stable gross and EBITDA margins. Excluding one-time gains and losses and non-operating items, adjusted EBITDA margins ranged from 11.0-11.8% between FY2016 and FY2019, showing exceptional stability. In addition, the company generates strong and stable cash flow from operations and has not encountered any significant liquidity problems for at least the last 6 years. The company has reported increased gross margins and lower distribution expenses in 1H2020, partly because consumers have increased their purchases of Tingyi’s high-end packets. For this reason, FY2020 adjusted EBITDA margin is likely to be higher than previous years and estimated to be 12.9%. We believe adjusted EBITDA margin to revert to 11.4% in FY2021, near FY2019’s level, as consumers resume to their pre-pandemic behavior. Credit Weaknesses • Low growth environment. The company’s beverage business focuses mainly on RTD tea, carbonated drinks and juice. According to Euromonitor, these are some of the slowest growing sub-industries in the beverage industry with some sectors having seen negative growth from 2014 to 2019. In addition, World Instant Noodles Association figures show that instant noodle volume had only 2.5% growth from 2016 to 2019. This means that both of Tingyi’s primary market segments have historically had low growth rates and given the current macro environment we expect that to remain for the near future. On a positive note, the company has shown improving operations in this low growth environment and we expect it to continue to show marginal improvements in profitability and operating efficiency. • Intensifying market competition. In addition to the low growth environment, consumer preferences are changing. Demand is favouring more premium, high-quality and healthier products with less oil, less sugar and less additives. However, Tingyi’s main products are arguably positioned towards the middle or mass market and some competitors may be more capable of taking advantage of this change in consumer preference. Tingyi is experiencing decreasing market share due to intense competition from these competitors. The premium products segment is seeing higher growth than the regular or mass market products where Tingyi has larger exposure. Tingy’s instant noodle market share by value has decreased from 51.1% in 2016 to 46.6% in 2019, while market share by volume seems to have stabilized at around 43.3% with no significant change. Likewise, Tingy’s market share by value in beverages is also decreasing. If Tingyi can improve its product mix with more financially successful premium products, its market share decreases should slow. 24 November 2020 Page | 2 RA02050200005 Corporate China Exhibit 2: Key Credit Metrics (RMB in millions) 2018A 2019A 2020E 2021F 2022F Revenue 60,686 61,978 64,923 66,469 68,932 Adjusted EBITDA* 7,183 6,975 7,785 7,573 7,902 Adjusted EBITDA Margin* 11.8% 11.3% 12.0% 11.4% 11.5% Return on assets (ROA) 7.6% 9.6% 9.6% 8.4% 8.6% Return on invested capital (ROIC) 10.4% 14.5% 16.9% 15.7% 16.4% Cash Flow Measures Funds from operations (FFO) 5,920 5,861 6,024 6,041 6,323 Operating cash flows (OCF) 7,099 6,208 6,923 4,368 4,976 Free cash flow (FCF) 5,745 4,380 5,175 2,303 2,630 Discretionary cash flow (DCF) 4,675 1,779 3,613 807 991 Capital expenditure 1,355 1,828 1,748 2,065 2,346 Balance Sheet Measures Cash and liquid investments 13,840 17,430 22,980 24,360 25,916 Excess cash 4,500 7,788 13,066 14,173 15,386 Total debt 10,835 12,374 14,849 15,592 16,371 Adjusted debt 6,335 4,586 1,783 1,419 986 Total capitalization 34,447 35,421 39,388 41,739 44,507 Leverage Measures Debt/EBITDA 0.9x 0.7x 0.2x 0.2x 0.1x EBITDA/Interest expense 16.9x 16.8x 17.3x 15.1x 15.0x Gross Debt/Capitalization 31.5% 34.9% 37.7% 37.4% 36.8% FFO/Debt 93.5% 127.8% 337.8% 425.8% 641.6% OCF/Debt 112.1% 135.4% 388.2% 307.8% 504.8% FCF/Debt 90.7% 95.5% 290.2% 162.3% 266.8% DCF/Debt 73.8% 38.8% 202.6% 56.9% 100.6% Debt/Equity 26.8% 19.9% 7.3% 5.4% 3.5% FFO/Cash interest expense 13.9x 14.1x 13.4x 12.0x 12.0x Source: Company, Pengyuan International Estimates 24 November 2020 Page | 3 RA02050200005 Corporate China Business Profiles F&B giant and the leading market player in the instant noodle and ready-to-drink tea market According to The Guinness World Records, Tingyi is the largest instant noodle company by value and the largest ready-to- drink tea beverage company by volume in the world. In 2019, the Company reported a total revenue of RMB 62 billion. It is the fifth largest publicly traded food & beverage company in China, right after WH Group, Yili Group and Kweichow Moutai and Mengniu. Internationally, Tingyi is still a very sizable company and is larger than a lot of well-known international companies such as Campbell Soup and Sudzuker. Notably, Nissin Foods Group, the second largest instant food company, reported a revenue of JPY 462 billion, or roughly RMB 29 billion, in CY2019.