Shandong Ruyi #B# Rating Affirmed With Stable Notes Rated #B-#

Stocks and Financial Services Press Releases Monday June 19, 2017 16:54
HONG KONG--19 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 19, 2017--S&P Global Ratings todayaffirmed its 'B' long-term corporate credit rating on Shandong Ruyi TechnologyGroup Co. Ltd. (Ruyi) with stable outlook. We also affirmed our 'cnBB-'long-term Greater China regional scale rating on the company.

At the same time, we assigned our 'B-' and 'cnB+' long-term issue ratings tothe proposed senior unsecured bonds that Prime Bloom Holdings Ltd., a whollyowned subsidiary of Ruyi, proposes to issue. We also affirmed our 'B-' and'cnB+' issue ratings on Prime Bloom's existing US$345 million senior unsecurednotes. Ruyi unconditionally and irrevocably guarantees the notes.

Ruyi is a China-based textile manufacturer with operations across upstreamcultivation and trading, and textile manufacturing to downstream apparel brandmanagement.

We affirmed the rating on Ruyi because we expect the company's operations willremain exposed to high competition and volatile commodity prices and to thefragmented nature of China's textile industry. In addition, Ruyi has weakerprofitability than its international peers'. We also expect the company'sfinancial leverage to remain high due to its aggressive debt-funded expansionappetite. Ruyi's large operating scale, wide product offerings, andsatisfactory geographic diversification temper these weaknesses.

The rating on the notes is one notch below the long-term corporate creditrating on Ruyi in view of the company's significant priority liabilities atthe parent level. Still, we recognize a modest level of mitigating factorssuch as the parent group's diversity of subsidiaries, which partially offsetsthe significant structural subordination risk.

We anticipate that Ruyi's EBITDA margin will improve to 11.0%-12.0% over thenext 12-24 months, from 9.6% in 2016. This reflects the full-yearconsolidation of French fashion firm SMCP in October 2016, SMCP's good growthprospects in Asia, and the ramp-up of Ruyi's production plants in Xinjiang and

Ningxia. The capacity expansion in Xinjiang and Ningxia will improve Ruyi'scost structure and operating efficiency because of lower manufacturing costsin the new production sites owing to government subsidy, cheaper utilitycosts, and highly automated production facilities. Ruyi's profitability mayremain weak in its textile and trading segments, reflecting intensecompetition in China.

We expect Ruyi's debt-to-EBITDA ratio to remain high at 5.5-6.5x over the next12-24 months, an improvement from 7.0x in 2016, due to the full-yearconsolidation of SMCP. Our debt assumptions include third-party guarantees ofabout Chinese renminbi (RMB) 3.4 billion, as of 2016. We continue to expectRuyi's leverage to remain above 5.0x, reflecting the company's aggressiveexpansion appetite.

The stable outlook reflects our expectation that Ruyi will maintain its marketposition through its large and vertically integrated operations, wide productofferings, and improving geographical diversification over the next 12 months.We expect the company to continue to deleverage, but the ratio of debt toEBITDA should remain above 5.0x over the same period.

We may lower the rating if we believe Ruyi's profitability has weakenedmaterially or the company is taking longer to reduce debt than we expect. Thiscould happen if we anticipate that Ruyi's EBITDA margin will consistently staybelow 10% owing to intense competition, low capacity utilization, or higheroperating expenses than we expect for the integration of new acquisitions.

We may also lower the rating if Ruyi's debt-to-EBITDA ratio stays materiallyabove 5.0x without signs of improvement, possibly due to more aggressivedebt-funded investment or a weaker operating performance than we expect.

We may upgrade Ruyi if its debt-to-EBITDA ratio falls below 5.0x on asustainable basis. This could occur through capital injections fromshareholders or equity disposals following successful IPOs of subsidiaries.The ratio could also improve on the back of materially enhanced operating cash

flow, given strong revenue growth, or margin improvement combined withfinancial discipline and continued deleveraging.

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