Hong Kong, November 08, 2019 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to Geely Automobile Holdings Limited's ("Geely") (Baa3 stable) proposed
USD senior perpetual capital securities.
The rating outlook is stable.
The rating reflects Moody's expectation that Geely will complete the perpetual
securities issuance upon satisfactory terms and conditions, including
proper registrations with the National Development and Reform Commission
and the State Administration of Foreign Exchange in China (A1 stable).
Geely will use the proceeds from the proposed perpetual securities for
business development and general corporate purposes.
RATINGS RATIONALE
"The proposed perpetual securities issuance will further boost Geely's
liquidity buffer and support its ongoing investments in research and development,
without significantly affecting its solid credit metrics and reported
net cash position," says Gerwin Ho, a Moody's Vice President
and Senior Credit Officer.
Moody's analysis of Geely's key credit metrics accounts for the 50%-owned
Lynk & Co joint venture on a consolidated basis.
Moody's forecasts that Geely's profitability, in terms of
its EBITA margin, will soften to about 7.3% over the
next 12-18 months from 9.4% in 2018, reflecting
lower utilization and continued investments in research and development.
Although Moody's also expects Geely's absolute debt level will increase
amid lower profitability, its leverage should stay low around 1.1x
over the next 12-18 months, which is strong for its rating
category and provides it with a good buffer against potential market volatility
and investment needs.
Moody's expects that Geely's market share will expand in the next 12 months,
with unit sales rising about 5% year on year from Moody's
forecast of about 1.4 million in 2019, outperforming the
broader auto industry in China.
Geely's liquidity position is solid. As of 30 June 2019,
its reported net cash holdings — excluding pledged cash —
totaled RMB10.5 billion. The company has maintained a net
cash position since the end of 2012.
Moody's treats the proposed perpetual securities as debt, because
the securities have a high step-up cost after the first call date
and contain a dividend suspension clause that creates an incentive for
the company to prepay the securities. Moody's assessment is despite
the securities demonstrating certain hybrid-like features,
such as the option of deferred coupons on a cumulative basis, and
no put options for investors.
Moody's has not applied notching to the perpetual securities rating to
reflect subordination risk, because the securities rank pari passu
with all other present and future unconditional, unsubordinated
and unsecured obligations of the issuer.
Moreover, Moody's assesses the likelihood of Geely deferring the
coupon over the next 12 months as low, given that the company is
rated Baa3 and maintained strong interest coverage, as measured
by adjusted EBITA/interest expense, of 99x in 2018.
However, the rating on the perpetual securities could be lowered
if Moody's assesses that the company is likely to defer a large number
of coupon payments in advance of a default.
Geely's Baa3 issuer rating reflects Moody's expectation that
the company will achieve good unit sales growth, given its strong
market position and the fact that it principally operates in China's (A1
stable) large and growing passenger vehicle market.
Moreover, the company's sustained strong credit profile acts as
a buffer against industry cyclicality and supports its Baa3 rating.
Geely's rating also factors in the strong competition in China's auto
market and the execution risks associated with its product and geographic
diversification.
Geely's rating also takes into account the following environmental,
social and governance (ESG) factors.
As an automaker, Geely is exposed to environmental risk.
Meeting regional emission requirements, particularly those relating
to CO2, is one of the most pressing and challenging objectives facing
the auto industry over the medium to long term.
Geely has invested in research and development to develop new energy and
electrified vehicles (NEEVs), including electric vehicles,
battery electric vehicles, hybrid electric vehicles, mild
hybrid electric vehicles and plug-in hybrid electric vehicles,
which will help the company manage environmental risk. The company's
NEEV unit sales reached 4.5% of total unit sales in 2018.
Geely is also exposed to social risks in the form of demographic and social
risks relating to environmental regulation, and the emergence of
new auto industry trends such as autonomous vehicles and ride sharing.
Geely's ownership is concentrated in a small number of shareholders,
including its chairman and family. Its parent company Zhejiang
Geely Holding Group Company Limited has also historically reported higher
leverage than Geely. This situation is partially mitigated by Geely's
status as a listed and regulated entity, and by its track record
of maintaining sound corporate governance.
Geely's issuer rating is not affected by structural subordination.
This is because the holding company runs significant operations that will
likely support the expected recovery for the holding company's debt.
The stable rating outlook reflects Moody's expectation that Geely
will continue to grow its scale and product breadth while remaining disciplined
in its financial management, as illustrated by its low debt levels
and strong liquidity position.
Upward pressure on the rating could emerge if Geely (1) further improves
its overall market share through successful sales of new models;
(2) further expands its product breadth and enhances its geographic diversity
to a level more comparable with that of its global peers; and (3)
maintains a prudent financial policy that includes low debt leverage and
solid liquidity on a sustained basis, against the backdrop of its
parent company's corporate activities.
Downward rating pressure could emerge if (1) Geely fails to grow its scale
and gain market share; (2) its profitability declines, such
that its EBITA margin drops below 6.5%-7.0%
on a sustained basis; (3) its debt leverage, as measured by
debt/EBITDA, rises above 1.5x-2.0x on a sustained
basis; or (4) its liquidity profile deteriorates.
The principal methodology used in this rating was Automobile Manufacturer
Industry published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Geely Automobile Holdings Limited is one of the largest privately owned,
local brand automakers in China. It develops, makes and sells
passenger vehicles that are sold in China and overseas. Its chairman
and founder, Mr. Li Shufu, and his family held a 44.36%
stake in the company at 30 June 2019. The company is incorporated
in the Cayman Islands and listed in Hong Kong.
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
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issued on a support provider, this announcement provides certain
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for securities that derive their credit ratings from the support provider's
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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
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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.
Gerwin Ho
VP - Senior Credit Officer
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
