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Rating Action:

Moody's assigns first-time A1 rating to Dongfeng

 The document has been translated in other languages

05 Oct 2015

NOTE: On October 05, 2015, the press release was corrected as follows: In the REGULATORY DISCLOSURES section, added the Insured and Guaranteed Ratings disclosure as the second paragraph, and removed the Paid Status disclosure. Revised release follows.

Hong Kong, October 05, 2015 -- Moody's Investors Service has assigned a first-time A1 issuer rating to Dongfeng Motor Group Company Limited (Dongfeng). At the same time, Moody's has assigned an A1 rating to the proposed bonds to be issued by Dongfeng Motor (Hong Kong) International Co., Limited -- an indirectly wholly owned subsidiary of Dongfeng -- based on the unconditional and irrevocable guarantee by Dongfeng.

The ratings outlook is stable.

The proceeds from the proposed issuance will be used for Dongfeng's offshore refinancing and general corporate purposes.

RATINGS RATIONALE

Dongfeng's A1 issuer rating combines its underlying credit strength and a three-notch parental uplift based on the expected strong support from its parent Dongfeng Motor Corporation (unrated).

"Dongfeng's underlying credit strength primarily reflects the company's competitiveness in China's auto market, its degree of brand and product diversity, and its robust financial profile," says Gerwin Ho, a Moody's Vice President and Senior Analyst.

Dongfeng is the key subsidiary of parent Dongfeng Motor Corporation, a central state-owned enterprise and the second-largest automaker in China by unit sales in 2014 with a 16.2% market share. Dongfeng accounted for 85% of the group's revenue in 2014.

Moody's expects Dongfeng and Dongfeng Motor Corporation to maintain their market position over the next few years, driven by robust sales growth at its joint ventures as well as at its own-brand passenger vehicle business.

Moody's notes that Dongfeng's product line-up is diversified and balanced. The line-up spans passenger vehicles and commercial vehicles, with models from each category exhibiting different price points, from entry levels to premium levels.

Dongfeng's models also range from traditionally powered vehicles to new energy-powered vehicles. This diversity in price and models supports the company's operating stability.

Dongfeng's credit quality is also underpinned by its prudent approach to financial management, reflected in turn by its maintenance of a net cash position over the past few years.

Although the recent slowdown in auto demand in China should lower its adjusted EBITA margin to 6.0%-6.5% over the next 12-18 months from 8.6% in 2014, Moody's expects debt/EBITDA and EBITA/interest to remain around 0.8x-0.9x and 11.0x-15.0x over the next 12 to 18 months. Such credit metrics are strong for the company's underlying credit strength.

Moody's assessment of Dongfeng's financial metrics is based on the pro-rata financials of its key joint-venture companies with Nissan Motor Co., Ltd. (A3 stable), Peugeot S.A. (Ba3 positive), Honda Motor Co., Ltd. (A1 stable) and Renault S.A. (Ba1 positive).

"But Moody's also considers that Dongfeng's underlying credit strength is constrained by its geographic concentration in China, the weak profitability of its own-brand autos business, and the political risk related to its Japanese joint ventures," says Ho, who is also the Lead Analyst for Dongfeng.

The three-notch rating uplift reflects -- as indicated -- an expected strong level of support from Dongfeng Motor Corporation, given Dongfeng's strategic importance to the group.

This assumption also reflects Dongfeng Motor Corporation's robust ability to provide support -- in case of a need -- based on its own strong credit profile, which is a result of its solid standalone credit quality, as well as a high level of support from the Chinese government.

The high support in turn reflects the auto industry's strategic importance to China and the company's position as the largest central government-owned automaker.

Moody's does not notch down Dongfeng's rating for structural subordination risk, given the low level of debt at its subsidiaries on a proportionate consolidation basis, as well as Moody's view that any support from Dongfeng Motor Corporation to Dongfeng, in times of stress, will be directly provided to Dongfeng as the holding company.

Dongfeng's stable rating outlook reflects Moody's expectations that (1) the company will maintain its strong market position and good access to funding; and (2) it will prudently manage its financial profile and growth.

Upward rating pressure could emerge over the medium term if Dongfeng (1) improves its overall market share through its successful sales of new models; (2) improves its profitability profile, such that its EBITA margins exceed 8%-10% on a sustainable basis; and (3) maintains a significant net cash position.

Downgrade pressure could emerge if (1) Dongfeng exhibits a meaningful weakening in its market position; (2) adjusted debt/EBITDA exceeds 2.0-2.5x; or (3) the company faces substantial changes in its joint-venture relationships, in particular with Nissan, Peugeot, Honda and Renault.

Dongfeng's rating could also come under downward pressure if the support from its parent weakens and/or the parent's credit profile materially deteriorates.

The principal methodology used in these ratings was Global Automobile Manufacturer Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Dongfeng Motor Group Company Limited (Dongfeng) is a key subsidiary of Dongfeng Motor Corporation, which was China's second largest auto maker in 2014 with sales of 3.8 million units. The company has a comprehensive product line-up, spanning passenger and commercial vehicles.

Dongfeng, which listed on the Stock Exchange of Hong Kong in 2005, is 66.9% owned by Dongfeng Motor Corporation, which in turn is 100% owned by State-owned Assets Supervision and Administration Commission of the State Council.

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.

Gerwin Ho
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 assigns first-time A1 rating to Dongfeng
No Related Data.
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