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Moody's upgrades Texhong's outlook to stable
Mar '16
Moody's Investors Service has upgraded the outlook on Hong Kong's Texhong Textile Group Limited's Ba3 corporate family and senior unsecured bond ratings from negative to stable.

Moody's has also affirmed both ratings.

"The outlook revision reflects Texhong's improved profitability as the company has grown its revenue and improved its adjusted EBITDA margin despite China's weak economic environment," said Chenyi Lu, a Moody's Vice President and Senior Analyst.

Texhong's revenue grew by a modest 1 per cent to RMB10.6 billion in 2015, mainly driven by a 10.5 per cent increase in sales volume of yarn but offset by lower average selling prices (ASPs).

The strong volume growth was supported by its diversified customer base and extended product offerings.

Moody's expects revenue to grow by 5 per cent per year in 2016 and 2017, underpinned mainly by sales volume growth, and partially offset by a modest decline in ASPs.

Its new yarn production capacities in Vietnam (B1 stable) and Xinjiang are expected to commence commercial operations in 2Q 2016 and 3Q 2016, respectively.

Its adjusted EBITDA margin improved to 15.9 per cent in 2015 from 10.1 per cent in 2014, largely due to an improved reported gross margin of 18 per cent in 2015 from 12.4 per cent in 2014.

The improved gross margin was driven mainly by lower cotton input costs and an improved product mix.

Moody's expects its adjusted EBITDA margin to remain stable at the current levels over the next two years, supported by a relatively stable gross margin.

Moody's does not expect a significant decline in cotton prices in a short period of time as prices declined significantly in China (Aa3 negative) in 2011 and 2014, limiting negative gross margin volatility.
At the same time, Moody's expects the company to maintain its current favorable product mix.

Therefore, its adjusted EBITDA grew by 58.5 per cent to RMB1.68 billion in 2015 from RMB1.06 billion in 2014.

"The stable outlook also reflects Texhong's improved financial leverage, which is at a level that is in line with its Ba3 ratings," said Lu, who is also the Lead Analyst for Texhong.

Its total adjusted debt grew by 32.7 per cent to RMB6.67 billion at end-2015 from RMB5.03 billion at end-2014, driven by higher capital expenditure (capex) and a greater cash balance at end-2015 to prepare for a debt repayment of about RMB1 billion in January 2016.

Moody's expects its adjusted debt/EBITDA to decline to about 3.5x over the next two years, owing to expected positive cash flow from operations and lower capex.

This level of leverage is in line with its Ba3 ratings.
The Ba3 ratings reflect Texhong's modest position in China's fragmented yarn market.

The ratings also take into consideration the exposure of Texhong's profit margins to market price fluctuations, including the purchase price of raw materials and selling prices for yarn, the latter of which are sensitive to end-user demand for downstream apparel and textile products. (SH)

Fibre2Fashion News Desk – India

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