OREANDA-NEWS. December 22, 2015. Fitch Ratings has assigned Jiashili Group Limited (Jiashili) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B' and a senior unsecured rating of 'B' with Recovery Rating of 'RR4'. The Outlook for the IDR is Stable. Fitch has also assigned Jiashili's USD20m convertible bonds a rating of 'B' and Recovery Rating of 'RR4'.

The convertible bonds are rated at the same level as Jiashili's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

KEY RATING DRIVERS

Well-Established Biscuit Maker: Jiashili was started in the 1950s and is one of China's largest biscuit producers, with 3.1% market share by sales in China. The Chinese biscuit market is a fragmented one, and the top player only has 14% market share. Jiashili is the largest Chinese-owned producer. The company's products are sold in almost 200,000 points of sales covering 31 provinces across the country.

Strong Growth Prospects: Biscuit consumption per capita in China is only a fraction of that in developed countries. The market is forecast to grow 16% in 2014-2018, driven by an increase in disposable income, according to an industry report by Euromonitor. Jiashili has traditionally focused on the low- to mid-end segment of the biscuit market, but it has launched several higher-end products in the past two years and has seen strong revenue growth in those segments. This should support double-digit revenue growth in 2015-2017.

Healthy Financial Profile: Jiashili is in a comfortable net cash position following its IPO in 2014, and Fitch expects the company to generate positive free cash flow in the next few years. The company also enjoys healthy margins that are comparable with packaged food companies rated in the 'BBB' range.

Potential M&A: Jiashili is seeking M&A opportunities that complement its existing business. This creates some uncertainty about the type and size of business the company might acquire. That said, Jiashili's robust balance sheet does offer a buffer - we estimate that it can spend up to CNY300m-400m in cash without raising additional capital, even assuming a passive investment where Jiashili does not gain direct access to the target's cash flows.

Small Scale Constrains Rating: Jiashili's rating is constrained by its small operating scale and limited diversification. It has less than USD200m in annual revenues, which makes it one of the smallest companies in the food, fast-moving consumer goods and diversified manufacturing group rated by Fitch. The company has fewer financial resources to compete with larger players in the market and its size means that it may struggle to deal with major external shocks. In addition, Jiashili has a limited product portfolio compared to other packaged food companies, with biscuits being the main product category.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- 17%-20% revenue growth in 2015-2017, mainly driven by new products
- Slight improvement in gross margins offset by increasing marketing costs, resulting in flat EBIT margins of 11%-12% over the next two to three years
- Capex of 9% of revenue in 2016 and 5% from 2017 onwards
- 30% dividend payout ratio

RATING SENSITIVITIES

Positive rating action is not envisaged for the next two to three years because of its limited scale and product diversification.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustained above 1.5x (net cash as of 30 June 2015)
- Declining market share
- Negative FCF on a sustained basis