Fitch Ratings has affirmed China-based food conglomerate Bright Food (Group) Co., Ltd.'s (BFG) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

The agency has also affirmed the Long-Term Foreign-Currency IDR of BFG's offshore subsidiary, Bright Food International Limited (BFI), at 'BBB+' with a Stable Outlook. A full list of rating actions is below.

Fitch rates BFG according to our government-related entity (GRE) criteria with a score of 30 points based on the Shanghai government's incentive to provide support to the company. This leads us to rate BFG on a top-down basis from our internal assessment of the creditworthiness of the Shanghai government. BFI is in turn rated one notch below BFG's IDR based on our assessment of BFG's 'High' operational, 'Medium' strategic and 'Low' legal incentive to support BFI under the Parent and Subsidiary Linkage (PSL) Rating Criteria.

Key Rating Drivers

Solid Support, Strong Control: We assess BFG's support record as 'Strong' due to the Shanghai government's continued asset transfers, including grain and oil reserves, and vegetable and fishery assets, grants, and equity and land injections. We assess BFG's status, ownership and control as 'Strong'. BFG is 99.57% indirectly owned by the Shanghai State-owned Assets Supervision and Administration Commission (SASAC) and 0.43% by the Shanghai Finance Bureau. Shanghai SASAC has strong influence over its board appointments, major strategies, and investment and financing decisions.

Strong Default Implications: Fitch assesses the socio-political implications of a default by BFG as 'Strong' as the company plays a key role in safeguarding the city's staple food supply, and ensuring quality and price stability. It stores all of Shanghai's edible oil reserves and 85% of its policy grain reserves, and supplies most of the municipality's vegetables, sugar and meat.

A default would result in significant disruption in Shanghai's food supply and undermine the city's oil and grain reserves. We also assess the financial implications of a default as 'Strong' as a default could harm access to capital markets for other GREs in Shanghai due to BFG's large scale, measured by both asset and debt size.

Diversified Business Profile: BFG's Standalone Credit Profile (SCP) is assessed at 'bb-' on its strong business profile, with leading market positions in several staple food sectors. BFG's subsidiary, Bright Dairy, is China's third-largest dairy company and the largest chilled dairy-product company. BFG is also the largest supplier of sugar, meat and vegetables in Shanghai. Its diversified business portfolio and geographical coverage help to offset fluctuations in a single product category.

However, the SCP is constrained by its high leverage, which we expect to remain at 9.0x-9.5x in the next one-two years. BFG's financial profile is mostly dragged down by its property business. We expect the EBITDA contribution from property to decline further after falling to 18% in 2022 from 25% in 2021, as we expect the company to focus on deleveraging and expanding its other core business segments, where performance remains stable. BFG's financial profile, excluding the property segment, is much stronger, with net debt/EBITDA of around 6.0x in 2022.

Strong Parent-Subsidiary Linkage: We rate BFI on a top-down basis, according to our updated PSL criteria based on our assessment of BFG's 'High' operational and 'Medium' strategic incentives to provide support to BFI while legal incentives are 'Low'. BFI is a fully owned subsidiary, tasked to diversify the group's food offerings with premium overseas products.

'High' Operational Incentive: BFI acts as BFG's offshore financing platform and manages the parent's liquidity and financing activities for offshore operating entities. BFI also manages most of BFG's overseas assets. It procures soybeans, beef, lamb, fishery products and wine from overseas to supply BFG's onshore business.

'Medium' Strategic Incentive: BFI accounts for around 40% of BFG's revenue, EBITDA and gross profit. It was the largest revenue and gross profit contributor in 2022 among all BFG's first-tier subsidiaries. We forecast sustainable revenue growth at a low-single digit as most of BFI's assets are in developed markets and therefore not a major driver of BFG's growth. However, these overseas assets add to BFG's geographical diversification and overall competitiveness.

Derivation Summary

A close GRE peer to BFG is Shanghai Huayi Holdings Group Co., Ltd. (BBB-/Stable), a chemical company also wholly owned by Shanghai SASAC. Both BFG and Shanghai Huayi have a 'Strong' assessment in terms of government control and support. The socio-political impact of a default is assessed as 'Strong' for BFG but 'Weak' for Shanghai Huayi.

BFG plays a pivotal policy role in storing Shanghai's edible oil reserves and the majority of its grain reserves as well as supplying the bulk of the city's agricultural produce. Huayi operates in a highly competitive market with a large number of manufacturers and replacement products. The financial implications of a default are assessed as 'Strong' for BFG but 'Moderate' for Huayi, as BFG's assets, debt size and domestic bond issuance outrank that of Huayi.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuers

BFG:

Revenue growth of 0%, 2%, 3% and 3% in 2023, 2024, 2025 and 2026, respectively;

Operating EBITDA margin of 6.4%-7.4%;

Capex of CNY6 billion per year over 2023-2026;

No major international M&A in the near term.

BFI:

Revenue growth of -2%, 2%, 1% and 1% in 2023, 2024, 2025 and 2026, respectively;

Operating EBITDA margin of 6.6%-7.2%;

Capex intensity to remain at around CNY1.5 billion per year over 2023-2026.

RATING SENSITIVITIES

BFG

Factors that could, individually or collectively, lead to positive rating action/upgrade

An upward revision in Fitch's internal assessment of the creditworthiness of the Shanghai municipality;

Strengthening of likelihood of support from the Shanghai government.

Factors that could, individually or collectively, lead to negative rating action/downgrade

A lowering of Fitch's internal assessment of the creditworthiness of the Shanghai municipality;

Weakening of likelihood of support from the Shanghai government.

BFI

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upgrade of BFG's ratings;

Evidence of strengthening linkages between BFG and BFI.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Downgrade of BFG's ratings;

Evidence of weakening linkages between BFG and BFI.

Liquidity and Debt Structure

Adequate Liquidity: BFG's cash and cash equivalents totalled CNY26 billion at end-2022 and its consolidated unused bank facilities amounted to CNY234 billion. These were more than sufficient to repay and refinance BFG's short-term debt obligation of CNY39 billion at end-2022. The company enjoys longstanding banking relationships with state, commercial and foreign banks on its strong state ownership, and is a regular issuer of commercial papers and corporate bonds in domestic and offshore markets.

BFI on a consolidated basis held around CNY10 billion in cash at end-2022 and its maturing debt was CNY14 billion. BFI maintained unused committed credit facilities of CNY8 billion at end-2022, mainly from international banks and Chinese banks' offshore branches. BFI can also use BFG's unrestricted cash-pooling scheme, which allows cash transfers to BFI in times of need.

Issuer Profile

BFG is a wholly state-owned enterprise under the Shanghai SASAC. The group's core business is food product supply, including farming, processing and manufacturing of dairy, sugar, meat, grains, oils and vegetables, and retail and distribution, including supermarkets. It is also engaged in real-estate, logistics and finance businesses.

BFI is a fully owned subsidiary of BFG that was established in 2011. BFI's businesses include the production of red meat, dairy and olive oil. It also deals in wine and distributes packaged food. It has operations in China, New Zealand, Israel, Italy, Australia and Hong Kong.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BFG's ratings are derived from Fitch's internal assessment of the creditworthiness of Shanghai province, based on a top-down approach in line with our Government-Related Entities Rating Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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