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Rating Action:

Moody's affirms Guanghui Group's ratings but revises outlook to negative

 The document has been translated in other languages

27 Mar 2020

Hong Kong, March 27, 2020 -- Moody's Investors Service has affirmed Xinjiang Guanghui Industry Investment (Group) Co., Ltd.'s (Guanghui Group) B2 corporate family rating (CFR) and B3 senior unsecured debt ratings.

At the same time, Moody's has changed the outlook on the company's ratings to negative from stable.

RATINGS RATIONALE

"The negative outlook reflects our view that Guanghui Group's operating performance in 2020 will likely be weaker than expected, given the increasing refinancing risks stemming from the deteriorating global economic outlook," says Roy Zhang, a Moody's Assistant Vice President and Analyst.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. More specifically, Guanghui Group's exposure to retail and discretionary consumption have left it vulnerable to shifts in market sentiment, especially given its sensitivity to consumer demand.

"That said, the impact is partially mitigated by Guanghui Group's large operating scale, strong market position in China's auto dealer industry, and track record of successfully refinancing its debt, as reflected by its B2 rating," adds Zhang.

Guanghui Group's revenue increased to RMB189 billion in 2018, growing by an average rate of 22% over the past three years. Meanwhile, its leverage -- as measured by adjusted total debt to EBITDA -- decreased to 6.0x at the end of 2018 from a peak of 9.9x at the end of 2016. These strong results were supported by the company's leadership position in the domestic auto dealer industry, and by its diversified business operations in energy and property.

Guanghui Group is the largest shareholder in China Grand Automotive Services Grp Co., Ltd (CGA, B1 negative), the leading auto dealer in China (A1 stable) in terms of unit sales, with a large network, strong geographic coverage, and a diversified brand offering. Its 33%-owned auto dealer business accounted for 88% of its consolidated revenue in 2018.

Moody's expects Guanghui Group's leverage ratio will increase from 6.0x at 31 December 2018 to 7.0x-7.1x in the next 12 to 18 months, due to the weak operating environment.

Founded in 1989, the company is one of the largest privately-owned enterprise in Xinjiang province. Over the past three decades, it has been through several economic cycles while meeting its debt obligations.

Guanghui Group's liquidity profile is weak due to its high reliance on short-term debt, which amounted to around RMB66.6 billion at the end of June 2019 and well exceeded its cash holdings -- including pledged deposits -- of RMB31.5 billion.

However, the company has a good track record of refinancing its debt, and also demonstrated good funding access in 2019 when overall funding conditions were not favorable for privately-owned enterprises in China.

In March, Guanghui Group exchanged about US$58 million of existing notes into new US$ notes due in 2021.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

In terms of environmental and social risks, some of Guanghui Group's businesses, such as its oil and gas, coal mining and chemical businesses, are exposed to high risks associated with tightening emission standards and health and safety measures. However, such risks are partially mitigated by the company's track record of operational continuity and business diversification.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Guanghui Group of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

In terms of corporate governance factors, Guanghui Group is a private company, and its corporate governance and transparency are weaker than those of publicly listed companies. The company's share ownership is concentrated in Ms. Sun Guangxin, who holds a 50.06% stake in the company as of the end of 2018. Such risk is partially mitigated by the presence of China Evergrande Group (B1 stable) as the second largest shareholder, with a 40.97% stake as of the same date.

The B3 senior unsecured bond rating is one notch lower than it would otherwise be due to structural subordination risk. This risk reflects the fact that the majority of Guanghui Group's claims are at its operating subsidiaries and have priority over its senior unsecured claims at the holding company in a bankruptcy scenario.

The outlook could be revised back to stable if Guanghui Group: (1) maintains its business profile; (2) improves its liquidity; and (3) refinances its short-term debt.

On the other hand, Moody's could downgrade the ratings if (1) Guanghui Group reduces its ownership in, or control over, CGA; (2) CGA's credit profile weakens materially; or (3) Guanghui Group's liquidity or credit metrics further deteriorate, such that its adjusted debt/EBITDA exceeds 8.0x and its EBITDA/interest falls below 1.0x-1.5x on a sustained basis.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Xinjiang Guanghui Industry Investment (Group) Co., Ltd. is a private company that operates in three key segments, namely auto dealerships, energy and real estate. At the end of June 2019, the company held a 33% stake in China's largest auto dealer by revenue, China Grand Automotive Services Co., Ltd.

Founded in 1989, the unlisted Xinjiang Guanghui was 50.06% owned by the Mr. SUN Guangxin at the end of 2018. Mr. Sun is the chairman, founder and controlling shareholder.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

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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.

Roy Zhang
Asst Vice President - 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

No Related Data.
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