Hong Kong, April 06, 2011 -- Moody's Investors Service has assigned a first-time Ba3 corporate
family rating to China Automation Group Limited ("China Automation").
At the same time, Moody's has assigned a provisional (P)Ba3
rating to its proposed USD senior unsecured bond issue.
The outlook for the ratings is stable.
The proceeds from the proposed bonds will be used for general working
capital purposes and to fund acquisitions.
The provisional status of the bond rating will be removed after China
Automation has completed the USD bond issuance upon satisfactory terms
and conditions.
RATINGS RATIONALE
"China Automation's Ba3 corporate family rating reflects its
leading position and track record in a niche market -- the supply
of safety and critical control systems to China's petrochemicals
and railways signaling sectors," says Ivan Chung, a
Moody's Vice President and Senior Analyst.
The company has a 71.3% market share in safety and critical
control systems in China's petrochemicals sector, and a 36.5%
share in railway interlocking systems through its subsidiary Beijing Jiaoda
Microunion, one of the four licensed suppliers certified by China's
Ministry of Railways.
"The ratings also incorporate the company's core competence
in safety and control systems, and its efficient cost structure.
These factors enable it to achieve strong growth and sustain its market
shares in both of these fast-growing sectors in China,"
says Chung.
Demand for China Automation's products is expected to remain strong
in light of the modernization and government-sanctioned expansion
of the petrochemicals and railways industries.
"But, China Automation's Ba3 ratings are constrained
by its strategy of broadening its market and product ranges through acquisitions,
and by the high level of working capital needs inherent to its control
systems industry," adds Chung.
In this context, since 2008, China Automation has acquired
Beijing Jiaoda Microunion Tech Co Ltd, Wuzhong Instrument Co Ltd
and Zhongjing Engineering Software Technology Co Ltd. These transactions
have helped it enter the railways market and strengthened its integrated
operations in the petrochemicals market.
"At the same time, Moody's considers China Automation
as small compared to its global peers, and that its market position
could be challenged in the long run by global players with more advance
technologies and financial strength," says Chung.
The stable rating outlook reflects Moody's expectation that the
company will maintain its strong market position in safety and critical
control products, and continue to pursue a prudent acquisition and
financial management strategy.
Upward rating pressure will be limited in the near term, given its
small scale. However, the ratings could come under upgrade
pressure over the medium term if China Automation establishes further
a track record of (1) consistently achieving its planned sales targets;
(2) successfully executing and integrating its acquisitions; (3)
further diversifying its product mix and end-market customer base;
and (4) strengthening its liquidity profile, while expanding its
operating scale
With respect to its credit metrics, Moody's sees total annual revenues
above RMB 3 billion, EBITDA/interest coverage consistently above
4x-4.5x, Debt/EBITDA below 2.5x-3x,
FFO/Debt above 25%, and adjusted debt/total capitalization
below 40 -- 45% as indications for a potential ratings upgrade.
On the other hand, the ratings come under pressure for a downgrade
if China Automation (1) loses its railways business licenses; (2)
sees a material decline in its sales, and/or profit margins,
such that its EBITDA margin falls below 15%; or (3) impairs
its liquidity, or increases its debt leverage materially due to
aggressive acquisitions.
A downgrade could be triggered if balance-sheet cash declines below
18% of total assets, or if its credit metrics are likely
to deteriorate, with EBITDA/interest below 3x, Debt/EBITDA
above 4x, FFO/Debt below 15%, and adjusted debt leverage
consistently above 50%-55%.
The principal methodology used in rating China Automation was Moody's
Rating Methodology on "Global Manufacturing Industry," published
in December 2010.
China Automation Group Limited specializes in providing safety and critical
control systems for the petrochemicals and railways signaling industries
in China. It began its operations in 1999 and listed on the Main
Board of the Stock Exchange of Hong Kong Limited on 12 July 2007.
Its three founders, Mr. Xuan Rui Guo (Chairman & Executive
Director), Mr. Kuang Jian Ping (CEO & Executive Director),
and Mr. Huang Zhi Yong (Executive Director), collectively
own 44.83% of the company.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Hong Kong
Ivan Chung
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Peter Choy
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's assigns first-time Ba3 ratings to China Automation Group Limited