century sunshine group holdings limited: credit initiation ......shandong hongri chemical joint...

Century Sunshine Group Holdings Limited: Credit Initiation Report

Important disclaimers at the end of this report

iFAST Research Team 20 October 2017

Debt Programme: S$300,000,000 Multicurrency Medium Term Note Programme

Issues Maturity Currency Amount Issued Payment Rank

CENSUN 7.000% 03Jul2020 Corp (SGD) 03/07/2020 SGD 101.75MM Sr Unsecured Source: Bloomberg, iFAST compilations

Summary and Conclusion

We are initiating Century Sunshine Group Holdings Limited (CENSUN) with a Neutral issuer profile. We reviewed the company’s recently announced reorganization plans to inject its magnesium assets into its listed subsidiary Group Sense (International) Limited. Although we think the transaction is a credit-negative event on the whole for bondholders due to their structurally subordinated position after the reorganization, we highlighted that the founding Chi family also faces the same structural subordination. In addition, the existing financial covenants from CENSUN’s debt programme provide investor protection against credit deterioration.

We deem CENSUN’s overall financial risk profile as Intermediate and its overall business risk profile as Fair. The company posted a respectable set of financial results in 1H17, despite having consolidated the results of a distressed acquisition since April. Overall, we believe the company’s strong cash flow generation, decent profitability and healthy balance sheet should help alleviate anticipated pressures from margins compression and heavy capital expenditures.

We are Overweight on the CENSUN 7.000% 03Jul2020 Corp (SGD). We think the bonds provide very attractive carry relative to the risk borne and short maturity. At prevailing pricing, the CENSUN 7.000% 03Jul2020 Corp (SGD) is trading at 7.28% YTW (ask), offering a ~578bps spread over SGD swaps.

Company Overview

CENSUN was established in 2000 by Mr Chi Wen Fu as a fertilizer producer in China. The company was listed on HKEx’s Growth

Enterprise Market in Feb 04 before transferring to the HKEx Main Board in Aug 08, and it was the first HK-listed company

specializing in ecological fertilizer business in China. In 2015, CENSUN acquired a 51.46% stake in Group Sense (International)

Limited (GSIL), a HK-listed company which sells electronic products and magnesium-related products. Over the years, CENSUN has

expanded its portfolio of business to include two core businesses selling fertilizer and magnesium products, complemented by the

metallurgical flux business and GSIL’s legacy electronics business. During the six months ended 30 Jun 17, CENSUN’s fertilizer

business and magnesium business generated 56.2% and 33.0% of total revenue, respectively (see Chart 1).

CENSUN derives its revenue predominantly from China, with most of its assets also located in the country. The company’s

magnesium facilities are located at Jilin Province and Xinjiang Uyghur Autonomous Region, while its fertilizer production sites are

located in Jiangsu, Shandong and Jiangxi provinces. In April this year, CENSUN completed its acquisition of a 50.5% stake in

Shandong Hongri Chemical Joint Stock Company Ltd (“SDHR”), which is a compound fertilizer producer in China with over 50 years

of operating history. Upon the completion of the greenfield fertilizer line in Jiangxi and the expansion of its Xinjiang magnesium

facility, management expects the company’s annual production capacity to reach 3m tonnes for fertilizer products and 170k

tonnes for magnesium products.

https://www.bondsupermart.com/main/bond-info/bond-factsheet/AN7511693





Chart 1: CENSUN’s revenue breakdown by segment in 1H17 and FY16

Quality of Management and Ownership (Strong)

CENSUN's founder Mr Chi Wen Fu and his sister Ms Chi Bi Fen led the executive management team as Group Chairman and Vice-

President respectively. Mr Chi's brother-in-law Mr Guo Mengyong also sits on the Board as a non-executive director. Together,

they controlled 34.4% of the outstanding shares of CENSUN as at 30 Jun 17. Mr Yang Yuchuan, the former executive director and

COO of CENSUN, has interests in 7.54% of CENSUN shares through the shareholding of Best Equity and Ms Lao Min (Mr Yang's

spouse).

Another substantial shareholder is the IFC, which owns a 5.3% stake in the company directly, and has deemed interest in another

549.28m (~12.0%) CENSUN shares pledged to its USD25m loan to the company. Also, we like the fact that Mr Chi owns SGD2.5m

nominal amount of the CENSUN 7.000% 03Jul2020 Corp (SGD), which at current pricing is worth more than ten times his total

compensation received from CENSUN in 2016. With regard to CENSUN's executive compensation, we appreciate that the

emoluments were rather modest and distributed equitably, despite the company's decent profitability. In addition, CENSUN has

signalled a gravitation towards a more conservative financing policy as it skipped the dividend for FY16 (FY15: HKD59.8m), citing

capital expenditure requirements.

Financial Analysis (Financial Risk Profile)

We see CENSUN’s overall financial risk profile as Intermediate considering the below analysis and factors, and the quality of its

management and ownership.

Pretax Interest Coverage (Intermediate)

In 1H17, CENSUN's operating profit rose 3.1% YoY to HKD271.5m from HKD263.3m a year ago, which was boosted by a

HKD41.0m gain on bargain purchase due to its acquisition of SDHR. CENSUN paid a token amount of USD1 for a 50.5%

stake in SDHR as the latter was in a bad financial shape. Due to higher borrowings after the consolidation of SDHR, interest

expenses jumped 14.2% to HKD73.5m in 1H2017 from HKD62.3m in the same period last year. Excluding the gain on

bargain purchase, CENSUN's interest coverage (EBIT/interest incurred) fell to 3.0x in the first six months of 2017,

compared to 4.5x in 1H16. On a full-year basis, CENSUN posted a 3.5x interest coverage ratio in the twelve months ended

30 Jun 17, a drop from the 4.2x in FY16 (FY15: 5.8x). We note that due to SDHR's distressed financial situation and tight

working capital condition (net current liabilities of RMB515.8m as at 30 Jun 16) when it was acquired, SDHR had previously

reduced production in early 2016 to ~20% of its plant capacity. As such, CENSUN's 1H17 results are probably not indicative

of future performance, and the company's performance should improve once it brings SDHR to full capacity and optimizes




product mix. In the meantime, we expect CENSUN's overall financial results for this year to be weaker relative to 2016 in

terms of profitability and interest coverage, with rising finance costs and margin compression more than offsetting the

strong revenue growth contributed by SDHR.

Leverage (Significant)

CENSUN's gearing has climbed gradually but steadily since 2014, when the company turned from a net cash company (as

at 31 Dec 13) to a net gearing (net debt/equity) of 2.6% at the end of 2014. Its leverage profile continued to deteriorate

in 1H17 after the consolidation of SDHR's borrowings, and net gearing rose to 28.3% from 20.9% in 4Q16 (4Q15: 1.6%).

In addition, we note that CENSUN has seen its market valuation steadily declined since 2015 (see Chart 2), while it

continued to take on increasing amount of debt. This combination resulted in the company's debt-to-market cap ratio

soaring to a worrying 1.8x at the end of June from 0.4x in 4Q15, wiping out all equity cushion (from the stock valuation).

Nonetheless, we think CENSUN's credit metrics remain manageable on both absolute and relative bases. Measured by

its debt-to-EBITDA ratio, CENSUN's leverage was modest at 3.0x in the twelve months ended 30 Jun 17, though that

number represents an increase from 2.5x in FY16 (FY15: 2.3x). As a reference, the median net gearing and debt-to-EBITDA

ratios of all Hong Kong-listed companies in the materials sector were 24.4% and 3.0x, respectively, according to

Bloomberg data. Moving forward, we think CENSUN's leverage profile is likely to continue worsen in the near term as the

company seems to be on an aggressive trajectory expanding both its fertilizer and magnesium production capacity. We

take some comfort from the protections from financial covenants existing in the company's S$300m debt programme,

which we shall elaborate on in a later section.

Chart 2: CENSUN’s equity cushion evaporated as its stock price tanked while debt continues to climb

Cash Flow (Intermediate)

Judging from its cash flow as a percentage of total debt, CENSUN's debt burden also seems moderate due to the

company's strong cash flow generation. Operating cash flow (minus interest expenses) jumped to HKD428.6m in FY16

from HKD84.3m a year ago, largely due to reduced working capital needs. CENSUN's interim report for 1H17 does not

include detailed cash flow statement, though we note the large spike in trade and other payables to HKD658.0m at the

end of June (30 Dec 16: HKD236.7m), most likely due to increased working capital requirements from the consolidation

of SDHR. We estimate the company's operating cash flow declining to ~HKD125m in the six-month period (TTM 30 Jun

17: est. HKD220m). Due to multiple ongoing expansion projects, CENSUN has ploughed large amount of capital

expenditures in recent years, investing HKD479.0m and HKD217.3m in FY16 and FY15 respectively. As such, the

company's free cash flow remained negative at HKD50.4m in its latest financial year, although that was an improvement



from -HKD133.0m in 2015. Looking forward, we think it is likely for CENSUN's free cash flow to remain negative in the

near term due to its expansion projects. The company is constructing a greenfield fertilizer facility in Jiangxi, and

increasing production capacity at the Xinjiang magnesium production base (held at GSIL) from the current 15,000 tonnes

to the government-approved capacity of 100,000 tonnes. In the longer run though, CENSUN's good track record provides

us some assurance that its cash flow generation should eventually catch up as it optimizes product mix and capital

investment needs abate.

Net Assets/ Quality and Saleability of Assets (Modest)

As of 30 Jun 17, CENSUN reported HKD1.82 billion of total borrowings (4Q16: HKD1.54 billion) against HKD6.58 billion of

assets (4Q16: HKD5.25 billion), for a debt-to-asset ratio of 27.7% (4Q16: 29.4%). As a reference, the median debt/asset

ratio of HK-listed companies in the materials sector was 25.3% according to Bloomberg data. The amount of property,

plant and equipment jumped to HKD2.92 billion at the end of June from HKD2.09 billion six months ago (4Q15: HKD1.86

billion), due to the consolidation of SDHR. At the end of last year, ~51.3% (HKD1.07 billion) of CENSUN's PPE comprised

of construction-in-progress as the company has several major ongoing projects (e.g. at Jiangxi and Xinjiang). Other major

categories of tangible assets at the end of June include cash (HKD877.8m), trade and other receivables (HKD625.4m),

inventories (HKD493.4m), mining rights (HKD474.3m) and land use rights (HKD294.4m). As we will discuss in a later

section (see Event Risk), CENSUN has announced a corporate reorganization that will result in its magnesium asset to be

injected into GSIL. We note the transaction is a credit negative for CENSUN's bondholders as they will then face some

structural subordination due to the indirect ownership of the magnesium assets. In a distress scenario, CENSUN's

creditors can only claim against the 51.9% shareholding of GSIL, which would be subordinated against the claims of GSIL's

creditors.

Working Capital (Intermediate); Liquidity (Adequate)

As highlighted earlier, CENSUN's trade and other payables jumped to HKD658.0m during 1H17 (FY16: HKD236.7m) after

absorbing SDHR's balance sheet. At the same time, borrowings due within twelve months climbed to HKD713.0m (FY16:

HKD320.7m). As a result, CENSUN's current ratio sank to 1.2x at the end of June from 3.1x in 4Q16. During the same

period, CENSUN redeemed its S$125m CENSUN 7.200% 04Jun2018 Corp (SGD) while issuing S$101.75m in CENSUN

7.000% 03Jul2020 Corp (SGD). Cash balance fell HKD23.4m during 1H2017 to HKD877.8mn (4Q16: HKD901.2m). Overall,

CENSUN's liquidity remains adequate with cash/current borrowings at 1.2x (4Q16: 2.8x).

Profitability (Strong)

In contrary to what the share price performance of CENSUN implies, the company has consistently delivered above-

average profitability over the years. CENSUN recorded an average return on invested capital of 9.9% in the five years

ended 2016, compared to 3.6% achieved by its HK-listed peers. 1H17 results were above our expectations after taking

into account anticipated negative impact from the consolidation of SDHR's results (1H16: net loss of RMB124.1m). Total

revenue jumped 23.1% YoY to HKD1.52 billion from HKD1.24 billion in 1H16, driven by increased sales for both its fertilizer

and magnesium businesses. Net profit rose marginally to HKD129.7m (1H16: HKD128.5m), though as mentioned earlier

that was boosted by a significant HKD41.0m gain on bargain purchase from the SDHR acquisition. The top line growth

was driven a surge in volume sold due to the additional 97,250 tonnes of fertilizers sold by SDHR and significant growth

in magnesium sales volume from the Xinjiang production base. However, the increased sales mainly came from lower-

margin products, and as such gross margin compressed 5.5ppt to 24.5% in 1H17 from 30.0% in 1H16. SDHR produces

compound fertilizer which has a lower gross profit margin than that of organic fertilizers and Si-Mg fertilizers, and the

additional volume generated by the Xinjiang facility was basic magnesium products. Looking forward, we expect

CENSUN's full-year results to show similar trends with strong volume growth but significant margin compression. We see

the proportion of revenue coming from the lower-margin fertilizer business to rise, as SDHR continues to restore capacity

to normal levels, and given that the SDHR acquisition was only effective in April.





Amortization/Maturity Schedule; Capital Structure (Satisfactory)

At the end of June, CENSUN's borrowings that are coming due within one year stood at HKD713.0m (4Q16: HKD320.7m),

while HKD869.5m (4Q16: HKD983.9m) will mature between one and five years, and HKD20.8m (4Q16: HKD27.6m) after

five years. Bank loans at HKD900.3m comprised 49.4% of total borrowings, up significantly from HKD484.4m at the end

of last year, after CENSUN absorbs the liabilities of SDHR. Back in 2014, the International Finance Corporation (IFC)

granted a USD25m loan to a subsidiary of CENSUN, which is secured by a share pledge of 549.28m CENSUN shares by

Alpha Sino (the holding company controlled by Mr Chi). The IFC loan was carried on CENSUN's balance sheet at

HKD169.0m at the end of June (4Q16: HKD189.0m). The rest of the borrowings is made up of the S$101.75m (HKD534.0m)

CENSUN 7.000% 03Jul2020 Corp (SGD) and HKD217.7m (4Q16: HKD208.5m) of exchangeable bonds. The exchangeable

bonds were issued in Apr 16 to Wan Tai Investments Limited, a China Construction Bank subsidiary, and came with a 3-

year maturity and conversion option into 774,466,537 shares of GSIL (assuming full exercise of the exchange rights).

Negative Pledge, Financial and other Covenants (Strong)

The documentation for CENSUN's S$300m Multicurrency Medium Term Note Programme, under which its bonds are

issued, provides the following protections to the bond investors.

Negative Pledge: Yes

Financial covenants:

o Consolidated Tangible Net Worth shall not at any time be less than HKD1.8 billion. CENSUN carried HKD576.1m

of intangible assets and goodwill on its balance sheet as at 30 Jun 17 (4Q16: HKD198.1m), and its tangible net

worth was HKD2.75 billion (4Q16: HKD 2.86m).

o Incurrence covenant restricting the ratio of Consolidated Gross Borrowings to Consolidated Tangible Net Worth

to not more than 1.5x. CENSUN's debt-to-tangible equity ratio stood at 0.66x at the end of June (4Q16: 0.54x).

o The ratio of Consolidated EBITDA to Consolidated Interest Expense shall not at any time be less than 3.0x. We

estimate this to be 4.7x in 1H17 (FY16: 5.2x).

Change of Control Put: Yes

At the option of the bondholder, CENSUN shall redeem the bonds at 101% of the principal amount, together with accrued

interest, upon the occurrence of a Change of Control event, which includes the shareholding of Mr Chi dropping below

30%.

Delisting Put: Yes

Cross Default: Yes

Other Qualitative Factors (Fair)

Although CENSUN stated in its 2016 annual report that "the Group does not have significant exposures to foreign currency

risk", we note that it borrows a significant amount in currencies other than RMB while operating solely in China. This

creates risks when the RMB depreciates against those currencies. As at 31 Dec 16, CENSUN had HKD659.7m of borrowings

denominated in SGD, HKD189.0m of USD borrowings, and HKD284.2m of HKD borrowings, with the remaining debt

denominated in RMB. The company currently does not have a foreign currency hedging policy in place, and reported

HKD33.7m of loss in exchange differences during 1H17 (1H16: HKD37.9m). During the same period, CENSUN reported

HKD134.6m in other comprehensive income due to exchange differences arising from translation of foreign operations,

which brought the company's foreign translation reserve to a negative HKD145.7m (4Q16: -HKD278.9m). Nonetheless,

we are not overly concerned over the company's exposure to FX volatility given that it is still manageable at current levels.

Industry Considerations (Business Risk Profile)

We see CENSUN’s overall business risk profile as Fair, considering the below analysis and factors.

Economic Cyclicality (Vulnerable)

Both of CENSUN's core businesses, fertilizer and magnesium products, are essentially producing and selling commodities.

Just like any other commodities, the prices of CENSUN's products are highly cyclical and sensitive to the fluctuations in

their demand and supply conditions. Incumbents usually expand production capacity and new players enter the market

when prices are high, and the reverse occurs when prices are below economic costs, resulting in regular periods of

overcapacity and undercapacity. Similar to most other fertilizer producers, the share price performance of CENSUN has




been dismal in the past several years as oversupply significantly reduced commodity fertilizer prices (see Chart 3). The

demand for non-ferrous metals such as magnesium, which is used in the transportation and electronic products

industries, fluctuates according to the waxing and waning of the economic cycle. The cyclicality of the metals industry is

also exacerbated by the bigger proportion of the services industry in today's economy, which consumes relatively little

metal and tends to be more resilient in times of recession.

Chart 3: Average domestic spot prices for the three main fertilizers—phosphates (DAP), potash (MOP) and nitrogen (urea)

Growth Prospects (Strong)

Given that China is the most populous country in the world, it comes as no surprise that the country is also the largest

fertilizer producer and consumer globally. The large demand for food and decreasing arable land should support the long

term growth potential of the fertiliser industry. CENSUN's fertilizer business also benefits from favourable national

policies of the Chinese government, as it seeks to encourage the use of ecological fertilizers in China. In one of the latest

developments, Ministry of Agriculture of People’s Republic of China announced in February subsidies of RMB1 billion to

100 counties within the country to replace chemical fertilisers with organic fertilisers.

The growth trajectory for CENSUN's magnesium business looks optimistic as well, as energy savings and emission

reduction measures by the Chinese government support demand for magnesium alloys due to their eco-friendly nature.

According to the government's projections in its “Thirteenth Five-Year Plan of the Nonferrous Metals Industry”,

magnesium output is expected to reach 1.5m tonnes by 2020, growing at a CAGR of 7.1%, which is the fastest growth

rate among nonferrous metals. The 13th five-year plan also encourages Chinese nonferrous-metal produces to upgrade

production lines and extend value chains to include highly processed products, which may help them improve

competitiveness in global markets and enjoy wider applications for their products.

Competition (Satisfactory)

The magnesium and fertilizer industries CENSUN operates in are highly competitive, and pricing is often the primary

factor in determining sales level, especially in the more commoditized NPK compound fertilizers and basic magnesium

products segments. The competitive pressure is somewhat mitigated by the technical barriers to entry in CENSUN's rare

earth magnesium alloy products and other fertilizer products (e.g. organic and Si-Mg compound fertilizers), and the

company's above-average profit margins provide some evidence of its competitive advantages. In 1H17 and FY16,

CENSUN achieved an average gross profit margin of 23.0% and 28.4% respectively for its fertilizer business. As a reference,

estimates calculated from fertilizer prices and production costs in China indicated that the average fertilizer industry

margins were 11.7% and 13.9% respectively during the same comparison periods (see Chart 4).



Chart 4: Fertilizer margins continued to be under pressure in 2017

Research and Development (Satisfactory)

As of 28 Apr 17, CENSUN (as a Group) holds 20 patents, eight of which are for the fertilizer business and the remainder

is for the company's magnesium products. In its fertilizer segment, CENSUN employs a team of 85 personnel responsible

for the R&D of new fertilizer products as well as processing technologies, which is supported by the Chinese Academy of

Agricultural Sciences. On the magnesium products side, CENSUN has a R&D team of over ten personnel. In July 2013,

CENSUN announced that its subsidiary, China Rare Earth Magnesium Technology Holdings Limited (CRE), had entered

into a shares subscription agreement with affiliates of the Changchun Institute of Applied Chemistry (CIAC), which

introduced CIAC as a strategic shareholder of CRE (3%). CIAC is one of China’s most authoritative national research

institutes dealing with magnesium alloys business, and two researchers with the institutes currently consult CENSUN on

its magnesium research. During FY16 and FY15, CENSUN reported HKD19.3m and HKD17.5m respectively as R&D

expenditures.

Sources of Supply (Fair)

CENSUN relies on a number of major suppliers for significant raw materials such as ferrosilicon and potash, and price

variations in important production inputs (coal, natural gas or crude oil) could materially affect the price movement of

fertilizers. Nevertheless, in both CENSUN's core fertilizer and magnesium businesses, the bulk of the operational costs

comprises of variable costs (e.g. raw materials, energy). The price floor in such industries, where no incumbent enjoys

large economies of scale advantages, is typically set by the producers with the highest production cost.

Degree of Regulation/ Government Influence (Fair)

CENSUN has a RMB131.2m grant from the Ministry of Finance and the Ministry of Land and Resources that was given to

its subsidiary Baishan City Tianan Magnesium Resources in order to promote the development of the magnesium

production industry. As at 31 Dec 16, Baishan City Tianan Magnesium Resources has received ~HKD68.3m under the

grant. Also, the Chinese government currently provides a number of incentives to farmers in the country, such as value

added tax exemptions. The incentives allow CENSUN’s end-customers to have higher disposable income, which can be

spent on purchasing fertilisers for their crops.

In July 2015, the Linyi Municipal People's Government Office issued a relocation notice to chemical companies in Linyi

City. Hongri Acron (the former name of SDHR) was scheduled to start its relocation from 2018 onwards, and to complete

the relocation by 2020. In accordance with existing regulations, CENSUN expects to receive compensation for the

expropriation. In addition, CENSUN believes it is able to relocate SDHR's business to its new Jiangxi production line, and

the relocation would not meaningfully affect SDHR’s performance in the longer term.



Labor (Satisfactory)

CENSUN has not reported any work stoppages, strikes or other labour incidents. On the same day (3 Aug 16) that CENSUN

announced it has entered into an acquisition agreement with Best Equity Holdings for the 50.5% stake in SDHR, the

company also announced the resignation of Mr Yang Yuchuan as executive director and COO, with "other business and

personal commitments" cited as the reason. Mr Yang holds a 47.17% interest in Best Equity.

Event Risk (Fair)

One day after putting out its 1H17 results, CENSUN (via a joint announcement with GSIL) announced its reorganization

plan to inject all its magnesium related assets into its partially-owned listed subsidiary, GSIL. The deal is subjected to

approvals from independent shareholders of both CENSUN and GSIL, and circulars containing further information on the

transaction are expected to be dispatched by the end of this month. In summary, CSG will inject CRE, which holds the

magnesium production facilities at Baishan City, Jilin Province, into GSIL (see Chart 5 and Chart 6). CRE contributed

HKD190m net profit in FY16 (FY15: HKD183m) and carried HKD721m of net assets as at 31 Dec 16.

GSIL will pay a consideration totalling HKD1.73 billion to CENSUN, of which HKD1.31 billion is to be settled by the issuance

of new shares from GSIL to CENSUN (at HKD0.40 per share), and the remaining HKD420m is to be settled by the issue of

a convertible bond of GSIL to CENSUN. The transaction will also result in GSIL buying out the non-controlling interest of

Win Union in CRE for HKD172.0m (via issuance of new GSIL shares).

The HKD420m convertible bond to be issued by GSIL to CENSUN comes with a 3-year tenor and 4% coupon rate, and the

convertible rights can be exercised at HKD0.40 per GSIL share. Upon completion of the reorganization, CENSUN would

increase its shareholding in GSIL from 51.9% to a range between 60.8% – 72.5%, depending on the conversion of existing

convertible securities and after taking into account the 25% public float requirement imposed by the HKEx.

Overall, we see the deal as credit negative for CENSUN's bondholders. The holding-company structure of CENSUN post-

reorganization creates some structural subordination on the position of its bondholders as the company’s magnesium

assets would be held indirectly via GSIL. CENSUN’s ability to service its debt would then be partially dependent on the

upstreaming of dividends from GSIL, which could not lawfully distribute payments to shareholders before meeting the

claims of its own creditors. In the event of distress, the claims of CENSUN’s bondholders on the magnesium assets would

be limited to the company’s equity ownership in GSIL. Ceteris paribus, GSIL creditors, who are positioned closer to the

operating assets, would likely see a higher recovery rate in a worst-case scenario.

Nonetheless, we note that Mr Chi and his sister continue to lead the executive management team at both CENSUN and

GSIL. Their stake in GSIL is also held indirectly via the 34% ownership in CENSUN. As such, they face the same structural

subordination from the reorganization, which provides some alignment of interest between management and

bondholders. Also, the transaction allows the separation of two distinct businesses into separate listing platforms, which

should facilitate management focus and might trigger a valuation re-rating on the two companies (though GSIL is already

trading at ~2.2x P/B). Finally, we think the existing financial covenants on CENSUN’s bonds provide substantial

bondholder protection and some assurance of management’s funding strategy (e.g. debt/tangible net worth is restricted

to a maximum of 1.5x).



Chart 5: Organization structure before the Reorganization

Chart 6: Organization structure after the Reorganization



Bond Pricing and Recommendation

Thus far, we have not seen any significant price movements in the CENSUN 7.000% 03Jul2020 Corp (SGD) after the September

announcement of CENSUN’s reorganization plan to inject its magnesium business into GSIL (see Chart 7). The reorganization plan

is probably anticipated by most investors since management has been transparent about their intention to separate the fertilizer

and magnesium segments onto two listing platforms, since acquiring GSIL in 2015. Management could not proceed with the plan

back then as the acquisition of GSIL was deemed as a reverse takeover and as such, there were certain restrictions on such

transactions within the next 24 months after the deal.

The CENSUN 7.000% 03Jul2020 Corp (SGD) has been trading below par in the 99.0-99.7 range since September. At the current

pricing of 99.3 (ask), the CENSUN 7.000% 03Jul2020 Corp (SGD) is trading at a yield to worst of 7.28% (the issue is first callable on

3 Jul 19 at 103.5, for a yield to call of 9.40%) and a ~578bps spread over SGD swaps. Though we think CENSUN’s near-term results

would resemble those of 1H17—strong growth in revenue accompanied with further margins compression—and gearing is likely

to increase given the aggressive growth trajectory, these are mitigated by the company’s strong cash flow generation and stil l

modest leverage profile. CENSUN’s 1H17 results were also better than what we anticipated given the negative (profitability)

impact from the distressed SDHR acquisition. As such, we initiate the company at a Neutral issuer profile and believe the risk

reward profile supports an Overweight rating on the CENSUN 7.000% 03Jul2020 Corp (SGD).







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mentioned in this report, and may also act as the principal for any buy or sell trades.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a principal position in

CENSUN 7.000% 03Jul2020 Corp (SGD)s. The analyst who produced this report holds a NIL quantity in the securities mentioned in the report.

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century sunshine group holdings limited: credit initiation ......shandong hongri chemical joint...

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