Hong Kong, September 01, 2014 -- Moody's Investors Service has affirmed the Ba3 corporate family and senior
unsecured bond ratings of China Automation Group Limited.
The outlook on the ratings remains negative.
RATINGS RATIONALE
"The affirmation of the ratings primarily reflects our expectation that
China Automation's currently high financial leverage will improve moderately
over the next 12-18 months, owing to higher earnings,"
says Chenyi Lu, a Moody's Vice President and Senior Analyst.
China Automation's adjusted debt/EBITDA remained flat at 4.7x
for the 12 months to 30 June 2014 when compared with the level in 2013.
Its adjusted EBITDA/interest also remained unchanged at 2.5x.
These levels are weak for its Ba3 ratings.
However, Moody's anticipates that China Automation's
adjusted debt/EBITDA will improve to about 4.2x over the next 12-18
months. This assumption is based on (1) an expected improvement
in earnings, propelled by a robust growth in the control valve business
and a recovery in the railway signaling business; and (2) a moderate
decrease in debt, stemming from contained working capital deficits.
"Also, the Ba3 ratings continue to be supported by China Automation's
leading position in its core businesses, the good growth potentials
for its key-end markets and its adequate liquidity."
adds Lu.
These strengths are primarily counterbalanced by its small scale,
high working capital requirements and a degree of event risks.
China Automation's sizeable account and bills receivables,
which accounted for 83% of revenue for the 12 months to 30 June
2014, are a cause for concern. However, comfort is
derived from the overall good quality of the receivables, given
that the majority of the receivables are due to state-owned enterprises
in China.
China Automation's liquidity profile is strong, underpinned by its
expected operating cash flows of RMB150 million over the next 12 months
and cash holdings of RMB472 million at end-June 2014. The
company also had undrawn committed credit facilities of RMB859 million
at end-June 2014.
These cash sources are sufficient to cover its expected capital expenditure
of RMB80 million and short-term maturing debt of RMB342 million.
China Automation's revenue declined by 11.2% in 1H
2014 to RMB1.07 billion from RMB1.21 billion in 1H 2013,
mainly due to the closing of its two unprofitable businesses in the safety
and critical control system segment and sluggish revenue growth in the
railway signaling business.
However, its exit of the unprofitable businesses led to an improvement
in its adjusted EBITDA margin to 19.9% in 1H 2014 from 18.3%
in 1H 2013.
The negative rating outlooks reflects its currently high financial leverage
and a degree of uncertainty over whether or not it can improve its financial
metrics to levels consistent with its Ba3 ratings over the next 12-18
months.
The rating outlook could change to stable if China Automation (1) reduces
its debt by containing its working capital requirements to a moderate
level; and (2) improves its profitability, such that its adjusted
debt/EBITDA stays below 4.0x and EBITDA/interest remains above
3.0x on a sustained basis.
The ratings could be downgraded if (1) the company's market position
weakens materially; (2) its profitability is pressured further;
(3) its liquidity position deteriorates significantly; and/or (4)
its debt leverage increases materially due to aggressive acquisitions
or increased working capital deficits.
Financial metrics that Moody's would consider for a downgrade include
debt/EBITDA above 4.0x-4.5x EBITDA/interest below
2.5x-3.0x on a sustained basis.
The principal methodology used in this rating was Global Manufacturing
Companies published in July 2014. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
China Automation Group Limited specializes in providing safety and critical
control systems for the railways signaling and petrochemicals industries
in China.
The company began its operations in 1999 and was listed on the Main Board
of the Stock Exchange of Hong Kong Limited in July 2007. Its three
founders collectively owned 44.89% of the firm at end-2013.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Chenyi Lu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's affirms China Automation's Ba3 ratings; outlook remains negative