[ET Net News Agency, 15 November 2018] S&P Global Ratings revised the outlook on China
Mengniu Dairy Co. Ltd. (02319) to stable from negative. At the same time, the credit
rating agency affirmed the 'BBB+' long-term issuer credit rating on the company and the
'BBB+' issue rating on the company's U.S. dollar-denominated bond. Mengniu is a
China-based manufacturer of dairy products.
S&P revised the outlook to stable to reflect its view that Mengniu's consolidated
EBITDA, as well as operating cash flow, would gradually increase following the
optimization of China Modern Dairy's (CMD)(01117) operations.
S&P expects Mengniu to continue to refine CMD's operations and eliminate previous
excessive competition between the two entities. Mengniu increased its stake in CMD in
April 2017, and has stepped up resource integration between the two companies since
February 2018.
In addition, Mengniu has re-oriented all of CMD's downstream liquid milk products under
its own distribution, allowing better control on their selling expenses. The resource
optimization and cost savings should provide greater financial flexibility to Mengniu.
The agency forecast Mengniu's consolidated EBITDA would improve to RMB6.4 billion-RMB6.8
billion in 2018-2019, from RMB5.1 billion in 2017. S&P affirmed the ratings to reflect its
view that Mengniu would defend its market position and maintain its debt-to-EBITDA ratio
below 1.5x amid stiff competition.
Mengniu has refined its organizational structure and established stronger control over
distributors in key markets, since its management leadership change in 2016. However, key
competitor Inner Mongolia Yili's (Yili) wider penetration in lower-tier Chinese cities and
bigger cash reserves will continue to exert high competitive pressure on Mengniu, S&P
noted.
As a result, large spending on marketing activities would continue for Mengniu and Yili.
Mengniu's operating expenses increased by 38% and Yili's by 31% during the first half of
2018. Fierce competition resulting in steep discounts is the key risk factor for the
industry, it added. (KL)