Fitch Ratings on Sept. 25 affirmed WH Group Ltd.'s long-term foreign-currency issuer default rating and its senior unsecured rating at BBB+, citing the Chinese pork producer's strong market position in the global pork industry.
The rating agency said it maintained its stable outlook on the company to reflect its strong geographic diversification, well-managed inventory and good product mix.
The affirmation comes despite the outbreak of African swine flu in China in the second half of 2018, which weakened WH Group's financial profile. Fitch said WH Group's leverage rose to close to 2x, the threshold at which Fitch would consider negative ratings action.
It also said it expects the African swine flu outbreak to impact WH Group's packaged meat business, projecting that the unit will decline by 30% in 2019 due to the spike in raw-material prices brought by the disease.
However, the agency said WH Group's ability to manage its inventories, control production costs, raise packaged meat product prices and maintain financial discipline will help it to offset some of the effects of higher raw-material costs on profitability.
The agency noted WH Group's "vertically integrated" operation and geographical diversification across China, the U.S. and Europe. It said the company's financial profile remains healthy despite recent weakness.
Fitch said it does not forecast a positive ratings action unless the company significantly diversifies its product and geographical markets.
Meanwhile, it said a downgrade is likely if WH Group's funds from operations adjusted net leverage is sustained above 2x or if free cash flow margin is sustained below 1.5%. It can also lower the ratings if EBITDA margin remains below 8%, if the company maintains a decline in revenue or market share in key markets, or if the African swine flu's impact worsens, reducing the company's margins and pork supply beyond Fitch's expectations for 2019.
