Hong Kong, August 30, 2021 -- Moody's Investors Service has affirmed China Grand Automotive Services
Group Co., Ltd's (China Grand Auto) B1 Corporate Family Rating
(CFR).
The outlook remains negative.
"The affirmation reflects our expectation that China Grand Auto
will maintain its leading market position in the auto dealer market in
China. At the same time, we expect the company to improve
its financial metrics as business recovers, sustain its funding
access and meet its payment obligations," says Roy Zhang,
a Moody's Vice President and Senior Analyst.
"The negative outlook reflects the company's elevated leverage
and weak liquidity due to reliance on short term debt and uncertainty
on its ability to improve its liquidity management over the next 12 months,"
adds Zhang.
RATINGS RATIONALE
China Grand Auto's B1 CFR reflects the company's strong position
in China's (A1 stable) auto dealership market, large dealership
network, brand diversification and broad geographic coverage,
and increasing exposure to higher-margin service-related
revenue.
At the same time, China Grand Auto's CFR is constrained by the company's
weak liquidity and high reliance on short term debt.
China Grand Auto's leverage, measured by debt to EBITDA,
increased to 8.7x in 2020 from 5.7x in 2019, mainly
due to the pandemic. The company grew strongly year over year in
the first half of 2021, driven by recovering demand and higher margins.
As a result, Moody's expects China Grand Auto's debt
to EBITDA ratio to improve to 6.2x as of the end of 2021.
Moody's also expects China Grand Auto's business to strengthen
through its increasing exposure to the luxury segment and high-margin
service and maintenance segment, while preserving its capital structure
by focusing on network optimization rather than expansion over the next
12-18 months.
China Grand Auto relies heavily on short-term debt, resulting
in inadequate liquidity. As of the end of March 2021, its
restricted and unrestricted cash pool of RMB21 billion was insufficient
to cover its short-term debt.
Nevertheless, Moody's believes the company can roll over its debt
or meet its debt obligations, given its profitable operations,
strong market position and inventory of branded cars.
The company also has a track record of access to diversified funding channels,
including onshore and offshore facilities.
In addition, its strategic relationships with auto makers and highly
liquid working capital components provide it with some buffer against
its liquidity needs.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
China Grand Auto's ownership is concentrated in Xinjiang Guanghui Industry
Investment (Group) Co., Ltd. (B2 negative),
which held a 32.9% stake in the company as of March 2021.
This risk is somewhat tempered by the fact that China Grand Auto is a
listed and regulated entity, with minimal intercompany transactions
with Guanghui Group.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The outlook could be changed to stable if China Grand Auto maintains its
business profile and access to diversified funding sources, improves
its liquidity and maintains its leverage, as measured by adjusted
debt/EBITDA below 6.0x.
Downward pressure could emerge if China Grand Auto's business profile
weakens; revenue or margins, or both, decline because
of deteriorating market conditions or the termination of contracts with
vehicle suppliers; liquidity fails to improve or funding access weakens;
interest coverage, measured as EBITDA/interest, falls below
2.5x; or leverage rises above 6.0x on a sustained basis.
The principal methodology used in this rating was Retail Industry published
in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Established in 2006, China Grand Automotive Services Group Co.,
Ltd is listed on the Shanghai Stock Exchange and was 32.9%
owned by unlisted Xinjiang Guanghui Industry Investment (Group) Co.,
Ltd. (B2 negative) as of March 2021.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
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Roy Zhang
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
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
